Position Sizing in a High-Valuation World: Why Most Traders Get Wiped Out

The S&P 500 lost 25% in 2022. The average growth stock lost 60%. The traders who blew up that year were mostly not bad stock pickers. They were running 2015 position sizes in a 2022 valuation regime. With the Shiller CAPE near 39 in 2026, the same setup is loading again, and almost everyone is once again obsessing over what to buy instead of how much.

Position sizing is the least glamorous subject in investing and the single biggest variable in whether you survive long enough for your good ideas to pay. Here is exactly how I think about it.

Before anything else, internalize this table, because it is the entire argument.

Lose 10%, and you need 11% to get back to even. Lose 25%, you need 33%. Lose 50%, you need 100%. Lose 80%, you need 400%.

The recovery requirement is not symmetric, it accelerates. That is why drawdown control is not conservatism, it is offense. The investor who avoids the 60% hole does not need heroic returns afterward, and the one who falls in does. Most blown-up accounts were not killed by bad theses. They were killed by position sizes that turned a survivable thesis error into an unrecoverable hole.

There is a second, quieter arithmetic too: the psychological kind. Oversized positions hijack your judgment. When a position is too big, every red day screams at you, and screaming positions get sold at bottoms. Correctly sized positions let you think. I have never once made a good decision about a position that was keeping me up at night.

At a Shiller CAPE of 32+, expected 10-year returns are materially lower than they were at CAPE 18 to 22. That is not a crash prediction, it is a statement about starting conditions: when you pay more for each dollar of earnings, your margin of safety per dollar deployed is thinner.

Thinner margin of safety means errors cost more, which means the rational response is fewer dollars at risk per idea. Not zero dollars. Not cash hoarding. Smaller unit sizes. The mistake of 2022 was not owning growth stocks, it was owning them at sizes calibrated to an era when everything bounced.

This is what I personally run. It is a description, not a prescription.

Core long-term holdings, 60 to 70% of the portfolio: index funds and blue-chip compounders, sized 5 to 8% each. These are the positions I add to on weakness, because the thesis is "the American economy," not a quarterly story.

High-conviction individual ideas, 15 to 25%: maximum 2% per name at entry while CAPE is above 30. If the thesis plays out, I scale in across tranches. The 2% cap means a total zero in any single name costs me 2 points, annoying but irrelevant to the decade.

Tactical bucket, 5 to 15%: shorter-term setups, more aggressive per trade, but the entire bucket is risk-capped at 4 to 5% of the portfolio in the worst case. The bucket can die without the portfolio noticing.

Cash and short Treasuries, 15 to 25%: currently yielding 4.3 to 4.7%. This is real dry powder that gets paid to wait, not cash as performance theater.

Say someone has a $20,000 portfolio and finds a stock they love. The 2% entry rule means a $400 starting position. Their gut screams that $400 is pointless, and the gut is exactly the problem. If the idea doubles, they made $400 and earned the right to size up the next tranche with evidence behind them. If it drops 60%, they lost $240, which is dinner-and-a-story money, not a setback that changes their year.

Now run the version everyone actually does: 25% of the portfolio, $5,000, on conviction alone. The same 60% drop costs $3,000, which is 15% of everything, which triggers panic selling, which usually happens at the low. Identical stock, identical thesis, identical outcome. One sizing decision separated a shrug from a disaster.

If the market is above its 10-year average valuation and my own drawdown from peak exceeds 15%, I cut all new position sizes by 50%, automatically, no debate, until either valuations reset or my recent decisions prove they deserve full size again.

The rule exists because drawdowns degrade judgment exactly when judgment matters most, and a pre-committed rule does not need judgment. The worst trades of my life all share one trait: they were sized emotionally during a losing streak, trying to win it back fast.

I am not saying go to cash. I am not saying high valuations guarantee a crash, they do not, and expensive markets can get more expensive for years. I am not saying small positions cap your upside, they cap your single-idea downside, which is different. I am saying the math of starting valuations is real, and sizing rules imported from 2015 will eventually meet a 2022, and the meeting is expensive.

Cap your loss per idea before you dream about the upside per idea. Most retail does the opposite, letting losers run on hope and trimming winners to feel smart. Over a full cycle, the math punishes that asymmetry without mercy.

Read next: Shiller CAPE 39 Math | Why Buy The Dip Is Dangerous

*Disclaimer: MentorSurge is not a financial advisor and this is not financial advice. This post is for educational and entertainment purposes only. Nothing here is a recommendation to buy or sell any security, and all examples are hypothetical. Position sizing rules are personal and must fit your own risk tolerance, horizon, and capital. Investing involves substantial risk of loss. Numbers cited were accurate when written and change constantly. Always do your own research and consult a licensed professional before making decisions with real money.*