The Core Problem: Cyclicals Drawdown Before They Recover
Even when you identify a genuine cycle trough correctly, the stock may continue falling for weeks or months before it turns. A shipping stock at 0.7x P/B can fall to 0.5x P/B before the cycle inflects. An energy stock at what appears to be a trough can drop another 30% if oil weakens further.
If your position is too large, this drawdown becomes psychologically and financially intolerable — and you sell at exactly the wrong moment. If your position is too small, you participate in the recovery but the absolute return doesn't meaningfully move your portfolio.
Position sizing is therefore not about maximising expected return — it's about sizing positions so you can hold through the inevitable drawdown before the recovery arrives.
A Practical Framework: The Three-Tier Approach
Tier 1: Core Position (50% of intended allocation)
Deploy the first 50% of your intended position when fundamental indicators first enter the buy zone — P/B below threshold, commodity prices depressed, order book low. This gives you meaningful exposure if the cycle turns quickly, without overcommitting before the trough is confirmed.
Tier 2: Confirmation Addition (30% of intended allocation)
Add 30% when technical indicators begin to confirm the turn — RSI recovering from oversold, MACD histogram improving, price stabilising. At this point you have both fundamental and early technical confirmation. Accept that this tranche costs more than Tier 1.
Tier 3: Trend Confirmation (20% of intended allocation)
Add the final 20% when the price reclaims its 200-day moving average — the strongest technical confirmation that the trend has genuinely changed. This is the most expensive tranche, but also the highest-confidence entry.
Maximum Position Sizes by Conviction Level
| Conviction Level | Signals Present | Max Portfolio Weight |
|---|---|---|
| Speculative | 1–2 fundamental signals only | 2–3% |
| Moderate | 3+ fundamental signals | 4–6% |
| High | 3+ fundamental + 2 technical | 7–10% |
| Very high | All signals aligned + sector trough confirmed | 10–15% |
These are guidelines, not rules — your personal risk tolerance, time horizon, and portfolio concentration should ultimately determine sizing. But a single cyclical position exceeding 15% of portfolio is difficult to hold through the inevitable volatility without emotional interference.
Rebalancing as the Cycle Progresses
Position sizing is not set-and-forget. As the cycle matures and a position grows (through price appreciation) to a larger percentage of your portfolio, disciplined partial profit-taking keeps the position within manageable bounds and gradually reduces risk as the cycle approaches its peak.
A simple rule: when a cyclical position grows to 2x its intended maximum weight (through price appreciation alone), sell enough to bring it back to the intended maximum. This forces systematic profit-taking at cycle highs — the hardest discipline for most investors to maintain.
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