How much does a 10 percent drop in one stock hurt my portfolio?
A move in one holding, times that holding’s share of the account, is the move in the account.
When one company in an account has a bad day, the headline number is the company’s move. The number that reaches the account is smaller, and it takes one multiplication to find it: the holding’s share of the account times the holding’s move.
The share is the holding’s value divided by the value of the whole account, cash included. If the account is worth $50,000 and one holding is worth $5,000, that holding is one tenth of the account, or 10 percent.
Worked example
A holding is one tenth of the account. It falls 10 percent. One tenth of a 10 percent fall is a 1 percent fall in the account. On the $50,000 account, the holding drops from $5,000 to $4,500; the account drops from $50,000 to $49,500. That $500 is 1 percent of $50,000.
The same multiplication runs the other way. If that holding rises 10 percent, the account rises 1 percent, all else unchanged.
What the multiplication leaves out
It holds for one holding moving while everything else stands still. On a real day the other holdings move too, and the account’s move is the sum of every holding’s share times its own move. Run the arithmetic once per holding and add the results.
Shares also drift. A holding that rises becomes a larger share of the account without anyone touching it, and one that falls becomes smaller. The share to use is today’s, from today’s values, not the share at the time of purchase.
Funds count by what they hold. A broad index fund that is half the account is one line on a statement, but its move is the combined move of hundreds of companies. The lesson on concentration looks at how much of such a fund can ride on a handful of names.
None of this says what share any holding ought to be. It shows how a move in one place reaches the whole, so the size of a holding and the size of its moves can be read together.
Primary Research: the 45° Report works through what a fall and a rise in one company each do