Risk budget

The maximum damage you will allow any single holding, or group of holdings, to do to the whole portfolio - stated in advance as a share of total capital.

Example

A 4% budget on a $250,000 portfolio allows $10,000 of loss from one holding, which is a $10,000 position if a total loss is possible or $20,000 if the realistic bad case is a 50% fall.

Important

The budget is denominated in damage, not in the size of the cheque. Setting it before you have a candidate in mind is the entire safeguard, because afterwards it bends.

Related terms

• Position size — How much of your total capital a single holding represents - the weight that decides how much any given move actually matters to you.
• Concentration risk — The risk that a large share of your wealth depends on a single outcome - one company, sector, property, currency, employer or counterparty.
• Portfolio construction — Deciding the shape of the whole - what each part of the money is for, how much goes into any one holding, what is held back, and along which dimensions the holdings are spread.

Lessons that explain it

• Position sizing: how much of it to own — Sizing is where conviction gets converted into consequences, and it is the one variable in investing that is entirely within your control. Most people set it by feel and discover afterwards what they actually decided. (12 min)

All 578 terms in the Investing glossary