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Position Sizing is More Important Now

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This complimentary article from TheStreet's Options Profits was originally published on September 28.

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The market has had a good run. After a good uptrend the temptation is to think that the market is somehow safer. That impression is even supported by readings on the VIX. Seemingly the water is safe for investors to take additional risks. In reality nothing could be farther from the truth.

Now is the time to think about reducing risk. It is not the time to think hubristically and take larger positions. Rather it is the time to maintain our position size discipline and even to cut back. My motto is that position sizing is the only sure way to reduce risk.

A review of my general guidelines on position sizing might be helpful. First, keep 20% of your portfolio in unencumbered cash. This is reserved for things like option exercises and the like. Then with the remaining 80% you spread it roughly evenly among as many positions as you can handle. By this I mean hold somewhere between a minimum of 10 and perhaps as many as 50 positions. That keeps positions even smaller.

However now I am saying to take even smaller positions because the market has run so far. This market has more to go but the downside is becoming increasingly risky despite the deceptive message of the VIX. Take smaller positions and perhaps even increase your cash reserve to more than 20%.

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