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Diversification of a port or sim is determined by a single preset number, either:
(1) a percentage of total port value, (Example: 20% signifies a 5-stock portfolio), or
(2) a dollar amount per holding (Example: $5000 per position, no matter how many dollars are in the port).

If a port's value increases significantly over time, for a lot of reasons it's best to increase the number of stocks held. Option 2 does that, but the increase is much too fast. Better would be a third option that specifies an initial dollar amount per stock, then increases that by the square root of the port value increase.

Example: Initial port value of $20,000, with 4 stocks ($5000 each). As the port grows to $80,000, the number of stocks held is:
(Option 1) Still 4 stocks
(Option 2) 4 times as many, i.e. 16
(Option 3) twice as many, i.e. 8. [This seems about right.]
Results: Total score: 95 , # of Votes: 25 , Average: 3.8
50 (10)
28 (7)
9 (3)
6 (3)
2 (2)
Scores are calculated as (importance) × (# of votes), where importance ranges from 1 to 5.
Requested by: jerrodmason
On date: 06/14/05
Category: Portfolio