Managing The Position Size

$Alibaba (BABA.US)$ One mistake some investors make is dollar cost averaging into only their losing positions, thinking they're buying the dip. However, winners tend to keep winning and it's often worth dollar cost averaging into them too.

For me, I dollar cost averaged into my Chinese holdings between April and September. I probably was a little too aggressive at first and should have started slower so that I could have continued to dollar cost average this month and over the next few months.

Chinese stocks now represent about 8.5% of my portfolio in real terms, and would represent a little over 10% of it if I hadn't lost some of my original investment. Considering my bullish view on China in the long term, I'd prefer to have my allocation to China a few percentage points higher than it is now.

However, I'm not going to commit more capital to these losing stocks for two reasons. First, as I said above, winners tend to keep winning. Although I don't want to believe it, it is always possible that Alibaba's stock will continue performing poorly especially if it delivers more weak quarters in the future. It's fine if I have a loser in my portfolio because it can be offset with other winners, but if I keep committing more and more capital to the loser then it will be difficult for winners to make up for that lost money.

Second, while I want a bit more exposure to China than I have now, it's not significantly more. If Alibaba and other Chinese companies rebound in the coming years as I expect they will, then they will grow to represent over 10% of my portfolio even if I don't invest any more money in them. For tax purposes, it's not ideal to be in a situation where you're overweight a company/sector and have to realize gains in order to manage risk (assuming you can get similar gains from another investment instead).

One helpful approach here is to look at your portfolio based on your initial investment allocations (ignoring gains/losses) and try to balance it based on that. Otherwise, you'll constantly be rebalancing into your losers to help them keep up with your winners.