• Basic Membership Access to Journal, Shadow Stock portfolio & monthly updates for stock screens
  • A+ Investor Full access to AAII.com, Journal, and a power data suite for investment ideas
  • AAII Platinum Full access to all of AAII's model portfolios and premium services at a significant discount
  • Dividend Investing Newsletter and model portfolio that focuses on dividend growth
  • AAII Growth Investing Find secular growth stocks poised for outperformance regardless of macroeconomic conditions.
  • Retirement Investing Discover trusted strategies for every stage of retirement. Get actionable insights and resources for smart retirement planning.
  • Sentiment Investing A research-driven newsletter with 10+ signals decoding sentiment across retail and institutional behavior.
  • Stock Superstars Report Get stock ideas inspired by the market's leading professionals
  • VMQ Stocks For the value investor looking to harness academic research in an actively managed portfolio
  • Bits and Bips Newsletter delivering insights on linking traditional finance, macro trends and cryptocurrency opportunities to help investors build stronger, more diversified portfolios.
All premium products come with free basic membership.
Explore All Membership Options
Join Now
AAII InvestoGraphic

Adjusting Overweight Positions

Guidance on how to pare down a position in a stock whose gains have caused it to have an outsized weighting relative to the other portfolio positions.

by Charles Rotblut | June 2018

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

1. Determine desired range (maximum, and minimum, relative position sizes to be allowed)

Maximum relative position sizes are set to help avoid stocks with harmful diversification due to overweighting. The more a particular holding is allowed to drift from the average position size, the more company-specific risk the investor is allowing. As these larger positions account for a greater percentage of the portfolio value, the portfolio will be more heavily affected if those positions decline.

One may choose to pare back an overweight position size to 1.5x in order to limit company-specific risk exposure, while also allowing the winning stock to ride. Narrower rebalancing limits may prevent “winning” stocks from gaining momentum and boosting returns. It may also increase transaction costs, as the investor would be rebalancing more often when the market is volatile. There are also tax implications when securities are sold.

In the case of AAII premium products Stock Superstars Report and VMQ Stocks, the maximum amount that an overweight position can drift has been set at 2.5x the average position size. AAII Dividend Investing sets a limit of 2.0x. To be clear, this rule applies to holdings that haven’t otherwise violated sell rules.

Minimum relative position sizes can also be used—to weed out stocks that have too little impact on your portfolio or to signal which companies to reinvest in (if they still meet other buy qualifications for your portfolio). “Underweight” positions for AAII Dividend Investing are usually 0.8x the average position size.

2. Calculate average position value


3. Calculate relative position size



4. Determine desired relative position size and amount to sell

Discussion

Joe from Mississippi posted over 8 years ago:

I recently experience this particular problem. I was also using 2.0x as my trigger point but instead of pulling back to my planned maximum of 1.5x for this growing company, I chose instead to drop back to 1.3x to give the company a few years of growth opportunity before I would need to trim it again.


Linda Epley from CA posted over 8 years ago:

Thanks for this article. Still learning.


You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.
Download the FREE Report Here: