I’ve been continuing to dig deeper into my ground-breaking study on how position sizing impacts the performance of real investors.
We recently put together a composite picture which shows the average impact of volatility based position sizing across all 40 investors from this study. Take a look …
The black line is the average performance of these 40 individual investors based on their original decisions. The blue line is the average performance when making only one small change – how much money is invested in each position.
To get the results represented by the blue line we used volatility-based position sizing. More money went into the less volatile investments and less money went into the most volatile investments.
It’s a stunning result.
What’s particularly stunning about it is the consistently positive impact on performance across all the major market phases of the study. Here’s the same chart but broken up into bull and bear phases of the market:
What I want to show you here is how the blue line is down less in bear market phases (1, 3 and 5) and up more in bull market phases (2 and 4). Here are the numbers:
- Phase 1 – Bear:
- Blue line down 2.1%
- Black line down 6.8%
- Phase 2 – Bull:
- Blue line up 9.9%
- Black line up 7.4%
- Phase 3 – Bear:
- Blue line down 8.6%
- Black line down 8.9%
- Phase 4 – Bull:
- Blue line up 34.5%
- Black line up 29.6%
- Phase 5 – Bear:
- Blue line down 7.7%
- Black line down 9.9%
In every bear phase, the blue line was down less than the black line. In every bull phase, the blue line was up more than the black line. You don’t get that kind of consistent outperformance by accident.
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I put together one other set of “average” numbers that I wanted to share with you as well.
For each investor in the study I took the top 10 best performing investments and the top 10 worst performing investments. I just looked at which investments had the best and worst percentage gains over the time period that the investment was held. So across the 40 investors studied that was the 400 best trades and the 400 worst trades.
I wanted to see what the characteristics of the best and worst trades were. Here’s what I found.
The 400 best trades had an average gain of 91.8% and an average volatility quotient (VQ) of 26.5%. The 400 worst trades had an average loss of 43.9% and an average VQ of 36.4%.
So right off of the bat we see that our investors lost the most money on their most volatile stocks.
Now let’s look at how much money was invested into these best and worst stocks.
The average position size of the best investments was 1.75% of the portfolio. That means that if the portfolio had $100,000 then the average investment size of the best investments was $1,750. The average volatility based position size for these best investments was 1.62%.
So investors did a decent job of putting the right amount of money into their best investments.
On the other hand, the average position size of the worst investments was 1.93%. Investors put more money into their worst outcomes (1.93%) than then did into their best outcomes (1.75%). Moreover, the average volatility-based position size for these worst investments was just 1.18%. Investors put way more money into their most volatile investments than they should have.
Could the secret to better investing really be so simple?
You better believe it!
To simplicity,
