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Updated: Jun 12, 2023

Today, we are going to look at OVER utilization of portfolios and how we can prevent this from happening!

Let's start by looking at this portfolio. 85% of the stock is allocated to COMM, which is a major imbalance and over utilization of this stock.

Why is this such a problem?

  1. No Liquidity! All your cash is tied into this one stock, so buying and selling other stocks is a NO GO until this stock is sold!

  2. You sell, you LOSE! If you SELL the stock than you will probably lose money. In this case if the stock was sold it would be about 4,000 - 5,000 USD loss.

  3. Even, more losses! There is always a chance a stock could go to ZERO and you OWE the bank money. Although the chances are small, a loss of this size would be hard to recover from. The shares purchased in the example is for COMM is equal to 49k. The account holder has an equity of 29k. Lets do the math! 49 - 29 = 20k that the account owner would owe the broker!

  4. Margin Fees, Oh my! If this account was purchased using a margin, then every day the stock is held then you will be charged a margin fee. Usually, it is relatively small, but it is still money coming from your pocket!

  5. Possible margin or house calls from your broker! Volatile days can introduce some major drawdown on accounts, which means the initial cash equity and margins will not cover the amount of stock purchased in your account. If it goes down too far, the broker may issue a house call and there are only two ways to get out of this call: sell your stocks or put more money into your account!

Let's talk about some things we can do to prevent this from happening?

Do NOT over buy in one position. Create a rule for yourself, write it down, and look at it often. "I will not buy more than X% of one position." Fill in the "X" for what make sense for you! In the case above this was 85% of the portfolio, which is way TOO HIGH! The example portfolio was a 29k equity account with 2x margins. This stock was using 49k of the funds. Rule of thumb for me is to keep it under 10% of the cash equity in my account.

Another option, is to put a stop loss order when you make the initial purchase, so if the stock goes down drastically then you are not being hit with a massive loss. It is a way to strategically plan your losses.

So, the idea is to never get into this position but if you do.. what should you do?

Hold the stock. Welcome to being called a bag holder! A "technical" term used amongst traders when you are stuck holding a stock! Many times stocks are very cyclical so sometimes you can just hold the position and wait for the price to increase or wait until the stock stabilizes to average down. My thought is.. if it hit that price before than it probably will hit again! Be patient!

Sell the stock. If the losses are in your tolerance level then sell the stock. Definitely need to look at the gains and losses for this one! However, usually this is what happens - people get emotional when they buy/sell stocks, so if you let the fear overcome you then they are definitely big losses in your future!

At the end of the day, you will need to make the best decision for yourself since I do not know your accounts and really can't offer any specific advice.

Here is an example of a more balanced portfolio. Notice that most of the positions average less than 10%. We are only talking utilization today, but there are also many other factors that go into balancing a portfolio.




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