As a finance expert, I often get asked about the best way to allocate assets in a portfolio. Most discussions focus on weighting by market capitalization or dollar value, but few explore the idea of asset allocation based on the number of shares. This method is less common but can be useful in specific scenarios, such as equal-weighted indexing, concentrated portfolios, or when managing illiquid securities. In this article, I’ll break down how share-based allocation works, when it makes sense, and the pros and cons compared to traditional methods.
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Understanding Asset Allocation by Share Count
Asset allocation typically revolves around portfolio weightings—how much of your total investment is in each asset. The standard approach uses market value weights, where each holding’s importance is proportional to its dollar value. However, share-based allocation assigns weights based purely on the number of shares held, regardless of their price.
Mathematical Representation
If I hold N_i shares of stock i and my portfolio contains k different stocks, the weight of stock i in my portfolio is:
w_i = \frac{N_i}{\sum_{j=1}^{k} N_j}For example, if I own:
- 100 shares of Stock A
- 200 shares of Stock B
- 300 shares of Stock C
The weights would be:
w_A = \frac{100}{100+200+300} = 16.67\%
w_B = \frac{200}{600} = 33.33\%
Comparison with Market Value Weighting
Most portfolios use market value weighting, where the weight depends on both share count and price:
w_i^{MV} = \frac{N_i \times P_i}{\sum_{j=1}^{k} (N_j \times P_j)}If Stock A is priced at $50, Stock B at $30, and Stock C at $10, the market-value weights would be:
w_A^{MV} = \frac{100 \times 50}{100 \times 50 + 200 \times 30 + 300 \times 10} = \frac{5000}{5000+6000+3000} = 35.71\%
w_B^{MV} = \frac{6000}{14000} = 42.86\%
Key Differences
| Metric | Share-Based Weighting | Market Value Weighting |
|---|---|---|
| Calculation | Number of shares | Shares × Price |
| Impact of Price | None | Direct influence |
| Rebalancing | Adjust share counts | Adjust dollar amounts |
| Volatility | Higher (if prices vary) | More stable |
When Does Share-Based Allocation Make Sense?
1. Equal-Weighted Index Strategies
Some indices, like the S&P 500 Equal Weight Index (EWI), assign the same weight to each stock regardless of market cap. If I replicate this strategy, I might buy the same number of shares for each company, leading to a share-based allocation.
2. Concentrated Portfolios
If I hold a small number of stocks and want to avoid overexposure to high-priced ones, share-based allocation can help maintain balance. For example, if I invest in two stocks—one at $1000 and another at $10—market weighting would skew heavily toward the first. Share weighting keeps them equal.
3. Illiquid or Micro-Cap Stocks
For thinly traded stocks, buying a fixed number of shares can be easier than targeting a specific dollar amount, especially if large orders move the market.
Advantages of Share-Based Allocation
- Simplicity – No need to track fluctuating prices for rebalancing.
- Avoids Overconcentration – Prevents high-priced stocks from dominating.
- Works Well for Small Portfolios – Easier to execute with limited capital.
Disadvantages
- Ignores Market Valuations – A $10 stock gets the same weight as a $1000 stock.
- Higher Turnover – Rebalancing requires frequent share adjustments.
- Risk of Underperformance – If expensive stocks outperform, this method lags.
Practical Example: Constructing a Share-Based Portfolio
Suppose I have $10,000 to invest in three stocks:
| Stock | Price per Share | Desired Shares | Investment Amount | Weight |
|---|---|---|---|---|
| AAPL | $150 | 20 | $3,000 | 33.3% |
| MSFT | $300 | 10 | $3,000 | 33.3% |
| AMZN | $100 | 30 | $3,000 | 33.3% |
Here, I’m using equal dollar allocation, but if I instead fix the number of shares, the weights shift:
| Stock | Shares | Price | Market Value | Weight |
|---|---|---|---|---|
| AAPL | 20 | $150 | $3,000 | 23.1% |
| MSFT | 20 | $300 | $6,000 | 46.2% |
| AMZN | 20 | $100 | $2,000 | 30.7% |
Now, MSFT dominates because of its higher price, even though share counts are equal.
Rebalancing Strategies
If I use share-based allocation, rebalancing involves:
- Selling shares of stocks that exceed their target count.
- Buying shares of those that fall below.
This contrasts with market-value rebalancing, where I adjust dollar amounts.
Tax and Cost Considerations
- Capital Gains – Frequent rebalancing may trigger short-term taxes.
- Trading Costs – More trades mean higher brokerage fees.
Final Thoughts
Asset allocation based on share count is not mainstream, but it has niche applications. It works best when:
- I want equal exposure regardless of stock price.
- I’m managing a small, concentrated portfolio.
- I need simplicity over precision.
For most investors, market-value weighting remains superior because it aligns with economic reality. However, understanding share-based allocation helps me make informed decisions when traditional methods don’t fit.
