Balancing Stocks

Assuming you have a nice company that you are buying stocks for, I would suggest investing enough that you can balance your holdings in the stock. I am not a stock person, but for the part of your portfolio which does contain individual stocks, I would suggest something like the following. Place 40-60% in stock positions and leave the other in savings. If you have only $10,000 (or less), I would say only invest maybe $4,000 of it. Anyways, if you have $100,000, you can invest $60,000 possibly buying 6 different stocks each position being $10,000. The reason you want to have cash on hand is to balance the stock.

For these calculations, I will use .3 and 1/(1-.3)=1.4285

1A. Lets say one of your $10,000 positions was bought at $1 per stock. This means you have spent $10,000 to own 10,000 stocks worth $10,000.

• Total Worth: $13,000
• On Hand Cash: $3,000
• Investment: $10,000
  • Number of Shares: 10,000
  • Share Price: $1

1B. Say the stock drops 30% to $.7 per stock. This means you have spent $10,000 to own 10,000 stocks worth $7000. Try to maintain a worth of $10,000 by making up the $3000 loss by buying 4285.7142=$3,000/$.7 stocks. This means you have spent $13,000 to own 14285.7142 stocks worth $10,000.

• Total Worth: $10,000
• On Hand Cash: $0
• Investment: $10,000
  • Number of Shares: 14,285
  • Share Price: $0.70

1C. Say the price jumps .4285% to $1 per stock. This means you have spent $13,000 to own 14,285.7142 stocks worth $14,285. Try to maintain a worth of $10,000 by making up the $4,285 gain by selling 4,285=$4,285/$1 stocks. This means you have spent $8,715 to own 10,000 stocks worth $10,000.

• Total Worth: $14,285
• On Hand Cash: $4,285
• Investment: $10,000
  • Number of Shares: 10,000
  • Share Price: $1

Of course, if you are targeting 30% changes, you will not gain as much if the prices increase very quickly. With this strategy you are assuming several ups and downs (market trends) before a long term benefit.

2A. Lets say one of your $10,000 positions was bought at $1 per stock. This means you have spent $10,000 to own 10,000 stocks worth $10,000.

• Total Worth: $13,000
• On Hand Cash: $3,000
• Investment: $10,000
  • Number of Shares: 10,000
  • Share Price: $1

2B. Say the stock jumps .4285% to $1.4285 per stock per stock. This means you have spent $10,000 to own 10,000 stocks worth $14,285. Try to maintain a worth of $10,000 by making up the $4,285 gain by selling 3000=$4,285/$1.4285 stocks. This means you have spent $5,715 to own 7000 stocks worth $10,000.

• Total Worth: $17,285
• On Hand Cash: $7,285
• Investment: $10,000
  • Number of Shares: 7,000
  • Share Price: $1.42

2C. Say the price drops 30% to $1 per stock. This means you have spent $5,715 to own 7000 stocks worth $7,000. Try to maintain a worth of $10,000 by making up the $3000 loss by buying 3000=$3000/$1 stocks. This means you have spent $8,715 to own 10,000 stocks worth $10,000.

• Total Worth: $14,285
• On Hand Cash: $4,285
• Investment: $10,000
  • Number of Shares: 10,000
  • Share Price: $1

If the stock drops and then increases, it is the same as if the stock increases and then drops.

Now there are two problems to consider. The first is that the position needs to be large enough that the alert values (.3, .42) allow to offset the cost of commissions, meaning you need a lot of money. The other problem is that this strategy assumes you have money to buy when drops occur, meaning you need a lot of money. If I had a huge amount of money and the companies had a huge amount of stock I would probably just day trade with several stable companies using small alert values (.003, .0042).

This post was reposted from http://sizuservices.blogspot.com/2010/08/balancing-stocks.html, originally written on August 29th, 2010.