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Not investment advice. Educational reading. See Disclaimer.
L.1 · BEGINNER · 2 MIN

Position Sizing and Rebalancing: Keeping Your Target Weights

Position sizing is how you set the target weight for each holding -- how much of your portfolio goes into each position. But weights do not stay put: as prices move, your winners grow into a bigger slice and quietly push your risk above the level you chose. Rebalancing is how you bring them back to target. This module covers both -- setting sensible weights, and the cross-asset rebalancing discipline that maintains them.

Quiz · 5 questions ↓

Compare

MethodHow It WorksBest For
Equal weightSame dollar amount in each stockBeginners, maximum diversification
Market-cap weightMore in bigger companiesMirroring the index (what S&P 500 does)
Conviction weightMore in your highest-conviction ideasExperienced investors with research edge

Key point

A common rule of thumb for a DIVERSIFIED portfolio: no single position over ~10% (many professionals cap at 5%). Treat it as one school, not a law -- concentrated value investors deliberately run far larger positions in their highest-conviction ideas and accept the higher single-name risk that comes with it. Buffett's 1996 chairman's letter is the canonical counter-argument: "diversification serves as protection against ignorance. It makes very little sense for those who know what they're doing." Pick the school that matches your edge and your stomach.

Try it

In the **Portfolio** view, try switching between weight modes: Custom, Equal, Price, Mkt Cap. Watch how your allocation changes.

Key insight

Position sizing is how you express conviction while managing risk. Big positions in your best ideas, small positions in speculative ones.

Check-in

Your single highest-conviction stock could plausibly lose 50% in a bad scenario. How should you size it?

Note

Going deeper on rebalancing

This module is the why; for the step-by-step mechanics -- calendar vs. threshold-band rules, and the tax difference between rebalancing in a 401(k)/IRA versus a taxable account -- see fpb-8 (Rebalancing) in the First Portfolio Builder path. And because selling your winners to rebalance feels wrong, bf-11 (Disposition Effect) in Behavioral Finance explains the instinct you are fighting.

Check your understanding

Sit with the ideas.

Your portfolio is VTI (US stocks), VXUS (international stocks), and BND (bonds), split evenly at one-third each. US stocks have a great year and VTI doubles while the other two are flat. What happened to your allocation?

Why:
Continue this lesson in the appAdaptive practice · saves your progress · remediation when you miss
Try this in paper trading

Dollar-cost average for four weeks

Pick one ETF or stock you'd hold for 10+ years. Paper-buy the same dollar amount of it once a week for four weeks — same day each week. Journal what you noticed about the rhythm of the discipline.

Open paper portfolio →

Practice mode — simulated trades, not investment advice.

Other lessons in this course.

  1. 01Position Sizing and Rebalancing: Keeping Your Target Weights— reading now
Continue this lesson in the app →See it on a real ticker →