Blue Chip Partners: Quarterly Edge Q3 2024
10/11/24Position Sizing: The Risks and Rewards
Introduction to Position Sizing (0:00:05 - 0:04:52):
Key Data: Daniel Dusina introduces two hypothetical portfolios, both starting with equal-weighted S&P 500 stocks from January 1, 2014. One portfolio is rebalanced monthly, while the other is not rebalanced at all. Over time, the non-rebalanced portfolio outperformed due to the concentration of high-performing stocks like Nvidia.
Equal Weighted S&P 500 index - The equal-weighted S&P 500 index is a version of the S&P 500 index where each of the 500 constituent stocks has the same weight in the index, unlike the traditional S&P 500 index where stocks are weighted by their market capitalization. This means that each stock contributes equally to the performance of the index, regardless of its size.
Concerns of Concentration: Highlighting the risks of concentration, Daniel points out that a single stock (Nvidia) can dominate a portfolio, leading to significant exposure and potential risks.
The Importance of Rebalancing & Behavior Biases (0:04:52 - 0:13:81):
Dan Seder emphasizes the dangers of not rebalancing a portfolio. While rapid gains can be achieved, the associated risks can be substantial.
Matthew Mondoux discusses behavioral biases such as regret aversion and recency bias, which can affect investors' decisions and lead to overconcentration in high-performing stocks. The endowment effect leads investors to place higher value on stocks they own simply because they own them. This can lead to overconcentration and resistance to selling. Anchoring causes investors to fixate on specific price points that can prevent investors from making rational decisions about when to sell or rebalance.
Technical Analysis and Portfolio Management (0:13:18 - 0:18:25):
Polarity and RSI: Dan Seder introduces the concept of polarity and the Relative Strength Index (RSI) as tools for technical analysis. RSI helps identify overbought or oversold conditions, providing signals for potential profit-taking or rebalancing.
RSI - The Relative Strength Index (RSI) is a tool used in trading to measure how fast the price of an asset is moving. It helps determine if an asset is overbought or oversold by using a scale from 0 to 100. An RSI above 70 suggests the asset might be overbought, and an RSI below 30 suggests it might be oversold. This can help traders decide when to buy or sell.
Balancing Risk and Reward (0:18:25 - 0:22:42):
Market Indicators: Daniel Dusina highlights the importance of considering broader market indicators and valuations when making portfolio decisions. Position sizing and rebalancing should be part of a comprehensive strategy that includes both fundamental and technical analysis.
Final Insights and Practical Tips (0:22:42 - 0:26:14):
Short-Term Greed: Matthew Mondoux warns against short-term greed and the pitfalls of chasing recent performance. Diversification and disciplined rebalancing are key to long-term success.
Technical Discipline: Dan Seder emphasizes the value of technical analysis in maintaining portfolio health. Using indicators like RSI can help investors avoid overexposure and manage risks effectively.
Conclusion
The discussion on position sizing underscores the importance of balancing risk and reward through disciplined rebalancing and technical analysis. Behavioral biases can significantly impact investment decisions, making it crucial for investors to have a well-defined strategy. Technical indicators like RSI provide valuable insights for making informed decisions about when to take profits or rebalance.
Key Takeaways for Investors:
- Rebalancing: Regular rebalancing helps manage concentration risk and maintain a diversified portfolio.
- Behavioral Biases: Recognize and mitigate behavioral biases to make more rational investment decisions.
- Technical Analysis: Utilizing technical analysis tools like RSI can help identify overbought or oversold conditions and inform rebalancing decisions.
- Holistic Approach: Combine fundamental and technical analysis for a comprehensive investment strategy.
By understanding these principles, investors can navigate the complexities of portfolio management and position sizing more effectively, enhancing their potential for long-term success.
Stay tuned for more insightful episodes of Blue Chip NOW!, where we continue to explore critical topics in the financial and economic landscape. Share this episode with friends and colleagues who might benefit from these valuable insights.
What to do after you’ve doubled your investment in the stock market. When to sell and when to hold.
From the ramifications of concentrated positions to how the RSI indicator can tell us if a stock is overbought or oversold, we're covering all the bases. We'll talk about the importance of combining technical and fundamental analysis, managing risk, and avoiding common investment pitfalls like recency bias and the fear of missing out.
In this episode of Blue Chip NOW!, Chief Investment Officer, Daniel Dusina CFA®, Senior Advisor Matt Mondoux CFA®, CMT, CFP®, and the firm’s Managing Partner Dan Seder, CFA®, CMT, CFP®, discuss position sizing from various perspectives.
But it's not all serious business. We've got a fun chat about Scottie Scheffler's amazing golf season and his caddy's impressive earnings. Plus, we'll touch on some hot economic topics, like the upcoming inflation print that could shake up the markets.
And don’t miss out—check out our YouTube channel for video versions of our episodes. Ready for some great insights and a few laughs? Tune in now!
Key Points From This Episode:
[00:00:49] Rebalanced and non-rebalanced portfolios
[00:03:12] Risks associated with concentration in a portfolio
[00:04:50] Responsible investing versus reckless behavior
[00:07:10] Behavioral biases in investment decisions
[00:10:31] Regret aversion and its impact on investment strategy
[00:13:02] Exploring the endowment effect and anchoring biases
[00:15:34] Using technical analysis for selling strategies
[00:19:04] The role of RSI in identifying overbought conditions
[00:22:41] The importance of technical analysis in portfolio management
[00:25:02] Scotty Scheffler's remarkable year in golf
[00:27:40] Upcoming economic data and its potential market impact
CLIP 01- Is fear of missing out negatively affecting your behavior as an investor?
Managing Partner Dan Seder CFA®, CMT, CFP®, Chief Investment Officer, Daniel Dusina CFA®, and Senior Advisor Matt Mondoux CFA®, CMT, CFP® discuss behavior biases in this clip from S2 E24 of the Blue Chip NOW! podcast.
CLIP 02- Debunking this trending stock market sales tip – to sell or not to sell that is the question.
Managing Partner Dan Seder CFA®, CMT, CFP®, Chief Investment Officer, Daniel Dusina CFA®, and Senior Advisor Matt Mondoux CFA®, CMT, CFP® give their thoughts on this popular stock selling tip in this clip from S2 E24 of the Blue Chip NOW! podcast.
CLIP 03- You don’t get paid based on a company’s earnings in the stock market
Managing Partner Dan Seder CFA®, CMT, CFP®, shows us why getting paid in the stock market happens differently than you may think in this clip from S2 E24 of the Blue Chip NOW! podcast.
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