How to Size Your Portfolio to Fit

I encourage you to calculate yours odds. Look at your trading. Divide it into two categories, winners and losers. How often do you win (relative to the index)? When you win (vs. the index), how much do you win on average? When you lose (vs. the index), how much do you lose on average? (Make sure you use your annualized results for this exercise.)

If you consistently lose vs. the index, I'd buy the index instead of continuing to lose capital trying to do it myself. If you beat the index, then work out the calculation that I went through for my portfolio. Take into account your conservatism, but even if you are aggressive, I strongly discourage you from using portfolio weights higher than the full Kelly criterion; it's too dangerous.

In general, I believe skilled investors with moderately sized portfolios are best served by diversification equal to what I use. On the raw Kelly criterion, it's equivalent to saying that one has an alpha between 2.5% and 3.3%. Hey, that's hot stuff! Most mutual fund managers would kill for those returns.

In summary, size your positions inversely to your expected alpha. To the extent that you are less certain of your skills, expand the number of your positions.

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