If you'd asked me ten years ago what mattered most in investing, I'd have said stock picking. I'd have been wrong. The single habit that's protected my portfolio the most — and, oddly, let me stay invested confidently through drawdowns — is deciding how much to put into a position before I decide whether I like it.
The question I ask first now
"How much am I willing to lose if I'm completely wrong?" comes before "what do I think will happen?" It sounds backwards, but flipping that order changes the decisions that follow. A position sized so a total loss barely dents the portfolio can be held through volatility that would otherwise force a panicked exit at the worst possible time.
Being right about a stock and being wrong about its size can still lose you money. Being wrong about a stock and right about its size rarely will.
A framework, not a formula
I don't use a rigid percentage rule for every trade, but I do work within rough bands depending on conviction and how well I understand the position:
- Core holdings (index funds, companies I've followed for years): can run larger, sometimes 8–12% of the portfolio.
- Individual stock bets outside my core: capped around 3–5%, regardless of how confident I feel.
- Speculative or new-to-me positions: 1% or less — small enough that being wrong is a data point, not a setback.
These bands are illustrative of how I think, not a formula to copy directly — the right numbers depend on your total portfolio size, time horizon, and how much volatility you can genuinely tolerate without making an emotional decision.
The trade I still think about
Years ago, I put a larger-than-usual chunk of my portfolio into a stock I was extremely confident in — the fundamentals looked clean, the story made sense, and I let conviction override my usual sizing rules. The company was fine. The stock still fell more than 40% over the following year on broader market conditions that had nothing to do with the business itself. Nothing was wrong with my thesis. Everything was wrong with how much I'd bet on being right at any given moment.
I didn't sell at the bottom, which I credit less to discipline and more to luck — the position, oversized as it was, still wasn't large enough to force my hand. That was the lesson: sizing isn't about avoiding losses, it's about making sure no single loss can make the decision for you.
How this shows up in my options trades too
The same logic governs how many contracts I write when selling covered calls or cash- secured puts. I size options positions off the underlying shares I'd be comfortable owning at that price, never off how attractive the premium looks in isolation. A premium that looks great on 10x the position I actually want is not a bargain — it's a sizing mistake wearing a discount sticker.
A simple gut check
Before opening any new position, I ask myself: if this went to zero tomorrow, would I be annoyed, or would it change my plans? If the honest answer is "change my plans," the position is too big — no matter how good the thesis sounds.