One of the most common questions I get asked is about portfolio size and position size. In particular the question always seems to move towards how much of one's portfolio should be used at any one point in time. Many popular investing figures claim that you should be 100% invested at all times, constantly keeping your money active in the markets. Others say that a 50/50 split between stocks and cash is the way to go. There are even some that teach using less than 35% of available funds. The problem is that there is no "one size fits all" strategy here. We all have different goals and risk tolerances. Today we will look at a few different types of traders to see if we can answer this tough question for as many as possible.

First we will want to take an approach. For instance maybe you are a day trader and that is all you like to do. In this case you will not look at how much of your account is in the market since you will be in and out quickly. Usually day traders look at a max loss per trade and then allocate the appropriate amount of capital relative to the entry price and the stop price. If you want to take $0.20 of risk and only lose $200 if the trade moves against you then you would purchase 1000 shares for that individual trade.

The most common question about portfolio commitment comes from what most call "swing traders." These are people that have a fairly active turnover rate for positions. Positions can be held for a few days to a few weeks but usually not much more than that. In this case it would be hard to suggest that you have 100% of your capital always committed. Most of the time I would ask how many positions you are comfortable with, and then divide from there. Let's say you find that you have an average of 10 positions on at any one point. We could take about 70% of your account and divide that evenly, leaving you with the other 30% for those times where you go slightly above your average.

Lastly, we have the long term investor. This is someone who would not be considered active and likes to leave positions for the long haul. Now this type of trader could be 100% in the market. This is due to the fact that these type of investors usually contribute a steady stream of extra money to their account. Usually a long term investor finds a few stocks or etf's that they like and consistently contribute more and more to them. With this type of investing, many will advocate to be very heavily invested. If not 100%, then something very close to it.

There is no wrong way to allocate your capital as long as it suits your needs and risk tolerances. I call it the stomach test. Most people get that sick feeling in their stomach when they have contributed too much to the markets.