How Should You Size Your Stock Purchases?

You finally have made the decision on a promising new stock to add to your portfolio. Now, the big question is, how much should you invest? Thinking about position sizing is a challenge for new investors and even something experienced investors may struggle with. In this video clip from Motley Fool Live, originally recorded on Jan. 14, Fool.com contributors Jason Hall and Brian Withers discuss considerations for how investors should think about position sizing.

Jason Hall: The next question here, I like this one a lot. [inaudible] says, "How closely do you guys track or you guys try to stick to purchasing a position that whatever dollar amount that is. I consider a position to be $10 to $15,000. However, I've bought $30-$50,000 on stocks I feel strongly about. How am I wrong?"

I don't think you're wrong, but I think here's the thing about it. This is the important part. I think it's better really wherever you are in your investing journey because your $30,000 might be peanuts to one investor and $3,000 might be a gigantic investment for somebody else. I try to think about it in terms of percentages. As time goes, the percentages continue to apply. The numbers just change. I think that's really important.

One other thing, I think David Gardner has a rule of investing no more than about 2% of his portfolio into a company when he buys it. Two percent might not be the exact answer, but it seems like 2% is that number. Again, that's not how large the portfolio that position can become, but that's how much cash gets invested into it. Brian, any thoughts on that?

Brian Withers: Yeah, I'm working with a guy who is just getting started and he's putting in $500 a month. He bought a partial share of Amazon and he was excited to actually buy Lemonade because he could actually buy one share of [laughs] the stock versus a partial share.

When I got started, I had a number in my head. I used $2,500, was the number. If I felt really strongly about it, I'd invest $5,000. If I was just getting in at a start-up position, I was less comfortable, I'd do half at $1,250. Similar, you can have a full, half, or double position going into it. Then those numbers for me, it changed over time.

Part of the reason why I dropped the number of stocks that I had was I still had this mentality of this $2,500 when some of the Discovery Services came out, I was investing I think a $1,000 apiece. For me at that time, that was a really small portion of my portfolio and it was inconsequential.

Hall: It didn't feel meaningful.

Withers: Yeah, it didn't feel meaningful. Maybe the 30 altogether did. But I didn't do like you, [laughs] I picked and chose the 20 or so that I wanted to get into. I don't think you're wrong. If you have a consistent number and then you can easily look at your portfolio and mentally calibrate where it is.

When I had a lot of stocks, I would think about moving things up into higher brackets. Top 10, top 20, top 30, moving them in, giving them enough investment to move them up. I know Jeb Sturmer (TMFJebbo) is out on the boards quite a bit. I frequently talk with him. He considers putting up to 6% into a position. I think my largest position that I've invested in is Atlassian (TEAM -0.22%) and it's actually only three and a half. It's been hard for me to get to the 6%.

Hall: I think an important follow-on comment to that too, is that a lot of times, especially with these companies and stocks have been so volatile, the idea of the market could be really highly valued right now, especially a lot of these tech companies. It might be good idea to build your positions out over time.

If your goal is to invest 2% or 3, or whatever percent your capital is in a company, maybe start with a half a percent or one percent and follow it, learn about the business, and then add over time. I think that's really important. It's not just how much you spend when you buy a company, but thinking about how you build out that portfolio.

Withers: Yeah, and MercadoLibre (MELI -1.79%) for me is a great example of that. I've owned it for over eight years [laughs] and I bought it 12 times.

Hall: I should have bought it 12 times. It's the second-largest stock in my portfolio and in terms of dollars invested, it's probably not in the top 30 [laughs] because it's been such a big winner.

Withers: Shopify (SHOP -2.37%) is like that for me, I invested [only] four times.