Ask Colin

How do you adjust existing positions if you add substantial amounts of capital to your portfolio?

I don't think that there is a simple answer to this question. If all the investments currently in your portfolio were near their buying price, you could argue that you should simply bring them all up to the new maximum size as quickly as possible.

However, if some were already very profitable, that might bring the break even price too close to the current price. You might even have seen such a rise that you had started taking profits. Would it make sense to put money back on the table?

The other aspect is our psychological adjustment to the larger amounts of money being invested. For a big funds manager, another couple of million dollars would be nothing, but for a private investor it is a real challenge. Most of us get used to handling amounts of a certain size and feel great anxiety if we are suddenly put in the position of handling bigger amounts.

Last year I was in exactly that position when I doubled the size of the funds in my share portfolio overnight. I also had some positions that had already seen large percentage increases and one where I had taken off half the position after it had doubled in price.

Rightly or wrongly, I initially decided not to touch the existing positions and start building new ones in other stocks. I found it difficult to double the size of the new positions. Instead of 6%, I began putting up to 4% only in the new positions. I ended up with close to 30 stocks, instead of the 17 to 20 I am aiming for. I then began to build the 4% positions to 6% and cutting out some of the smaller positions altogether. This took quite a lot of discipline at first, but it is now not as difficult, because I have got used to the larger amounts.

As I write, I have all my money in the market and have 21 stocks. 10 of them are at 6%. 3 are at4%. The rest are between 2% and 4%, including two that I had at the start of last year. One I increased recently and the other I have left at it original size. I am working on reducing the number of stocks a little bit more yet, to between 17 and 20 ideally.

So, I do not have a definitive answer for you, but have shown you some of the considerations. I think the task is to gradually move towards your investment plan. However, you may have to ride some existing positions through at the old size, simply because while you would continue to hold them, it does not make sense to move the break even price too close to the current price by buying more. Most of us will also take some time to feel comfortable with larger amounts of dollars. While we need to creep out of the comfort zone, it does not make sense to move so fast that we become frightened out of good positions because we have not yet got used to the larger dollar amounts.

I can anticipate that when I put this on my website and in my newsletter, that someone will email me that I am being silly. It is just numbers. Well, if it is just numbers to them, they are lucky. Most people have the opposite problem - they are not just numbers they are uncomfortably large amounts of money.

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