Most investors spend their time deciding what to buy. Far less goes into deciding how much to buy, what would make them sell, and how large a fall they could absorb before they start making decisions they regret. That gap is what a risk management plan fills. It doesn't need to be a document. One side of A4, written before your next trade, will do more for your long-term returns than another month of stock screening.
Start With a Number You Can Actually Live With
Risk management begins with a single figure: the amount you could lose without changing your behaviour. Not the amount that would annoy you — the amount that would not push you into selling at the worst possible moment.
Say you hold £60,000 in shares and funds. A 20% fall takes it to £48,000. Would you still hold, keep contributing and sleep? If so, your drawdown budget is £12,000. If a 10% fall already has you checking prices at midnight, set the budget lower. Honesty here is worth more than optimism.
Two filters come first. Money you need within the next three to five years generally belongs in cash or short-dated bonds rather than equities, and an emergency fund should sit separately. Risk capital is what's left.
Everything else follows from that one number: how large positions can be, how many you can hold, and when you are required to act.
This is general information, not personal advice. If your tax position, pensions or borrowing are complicated, a regulated adviser is worth the fee.
Size Positions So No Single Mistake Is Fatal
A worked example
A common approach is to risk a fixed, small percentage of the portfolio on each position — often somewhere between 0.5% and 2%.
On a £50,000 portfolio at 1%, that is £500 of risk per position. You buy a share at 240p and decide the thesis is broken below 200p, so the risk per share is 40p. Divide £500 by £0.40 and you get 1,250 shares, costing £3,000 — 6% of the portfolio.
Notice what happened. The risk figure set the size, not the other way round. A tighter stop allows more shares; a wider stop means fewer.
Then cap the result. Many investors limit any single holding to 8-10% of the portfolio, and less for smaller companies where spreads are wider and price movements sharper.
- Risk a fixed percentage per position, calculated before you buy, not after.
- Cap any single holding by weight as well as by risk, so one surprise cannot dominate the portfolio.
- Widen the stop and shrink the size rather than shrinking the stop to fit the size you wanted.
- Hold a cash buffer so that a purchase never forces a sale.
Check Correlation Before You Add Another Bank
Five holdings can be one bet in disguise. Two UK banks, a bank-heavy income fund and a financials tracker may look diversified on a statement while behaving like a single position when credit conditions shift.
Before adding anything, ask what it shares with what you already own: same sector, same customer, same commodity, same sensitivity to interest rates, same currency. If the answer is "most of the book", the new position should be smaller — or skipped.
A workable rule is to keep any single sector or theme — a country, a commodity, one regulatory change — below roughly a quarter of the portfolio.
A three-question overlap check
- Does it already appear inside a fund I own?
- Would the same news move both holdings in the same direction?
- If this theme had a bad year, what percentage of the portfolio would fall with it?
If the third answer surprises you, cut the size.
Decide Your Drawdown Limits in Advance
Limits work best when they are specific and written down. Two levels are enough.
Position level. Every holding gets an exit condition before you buy: a price, a change in the business, or a time limit. A price stop is the simplest, but it is not guaranteed — shares can gap through it overnight, and the spread can make the real exit worse than the level you set.
Portfolio level. Choose two thresholds and decide now what happens at each. For example:
- 10% below your peak: stop adding new money and review every holding against its original thesis.
- 20% below your peak: cut the weakest positions, trim the largest weights, and ask whether position sizes were too big to begin with.
The exact numbers matter less than the fact that the decision was made while you were calm.
Review Monthly, Not Hourly
A 30-minute monthly review keeps the plan alive. Check current weights against your caps, total sector exposure, whether each stop still makes sense, and whether you broke any rule. Note the breaches without drama. Breaking the same rule repeatedly usually means either the rule is wrong or the position is too big to hold comfortably.
Between reviews, use price alerts instead of watching the screen. Constant checking makes small falls feel large and encourages the behaviour the plan exists to prevent.
Keep It to One Page
The plan is finished when it fits on a single sheet. One version might read:
- Drawdown budget: 20% of a £60,000 portfolio, so £12,000.
- Risk per position: 1%, or £500.
- Maximum single holding: 8% of the portfolio.
- Maximum sector or theme: 25%.
- Exit conditions: written for every holding before purchase.
- Portfolio triggers: 10% — pause and review; 20% — reduce and rebuild.
- Review: 30 minutes on the first weekend of the month.
Date it. Then run the same three checks before every trade: what am I risking, what does it overlap with, and where would this leave my total drawdown if it goes wrong? Answer those three and you have done more risk management than most private investors ever bother with.
