The 5% Rule: How Much of Your Portfolio Should You Risk on Individual Stocks?

Picking individual stocks can be exciting, but it can also destroy your wealth if done carelessly. The 5% rule offers a simple framework to satisfy your stock-picking urges while protecting your financial future.

What Is the 5% Rule?

The 5% rule suggests limiting any single stock position to no more than 5% of your total investment portfolio. This means if you have $50,000 invested, you shouldn't put more than $2,500 into Apple, Tesla, or any other individual company.

Why This Rule Works

Even blue-chip companies can lose 50-90% of their value during market crashes. Remember Enron? General Electric lost 80% of its value from 2000-2018. By capping individual positions at 5%, you limit potential damage while still participating in potential upside.

Building Your Core First

Before stock picking, establish your foundation with 80-90% in diversified index funds. Then use your remaining 10-20% for individual stock bets. This approach lets you scratch the investing itch without risking your retirement.