In a Selloff, Shrink Positions or Position Size?

In the past, when I hit a major downdraft in the market, I find myself debating whether I should reduce the number of positions in my portfolio, or shrink the mean position size. The latter is the easier choice, which is why I take the former, and shrink the number of positions, forcing me to eliminate marginal names in the portfolio.

Today I added to Nam Tai Electronics (NTE) and Deerfield Capital (DFR), bringing my over all cash position down to 8%. As I work through my reshaping, I expect my cash level to decline further, but I would probably liquidate one of my 35 stocks without replacement to help fund the reshaping and rebalancing.

At times like now, this is a process that hurts, and sometime next week, I will announce my portfolio shifts. That said, the portfolio has held up better versus the market recently.

Full disclosure: long NTE, DFR

Comments

[granger:]

That is the first line of defense I take as well. I find what is best in my portfolio and add. Then force myself to take off a weaker position and only recommit part of its capital.

I have been in a buying mode the last few weeks (ouch). Many things on my wish list have been coming to my prices or core positions screamed to be added too.

I have currently worked myself down to just under 5% cash, the lowest I have been in almost 6 years.

2008 Jan 19 09:20 AM