I disagree with this suggestion for certain investors.
If you like a company and losing 5% or 25% of your net worth will not impact major financial decisions such as retirement, college for kids, etc., this “5% rule of thumb” could hamper long-term returns if you are a studious investor.
Of course it will moderate your returns to be less concentrated, but that works out better if you’re wrong. I think the 5% idea is more along the lines of a guideline for novice or non-professional investors to keep them from doing something too risky. Most people just aren’t that good at investing (if it were easy, everyone would be rich!), so often your “high conviction” idea is just one you like better than your others or for which you haven’t been able to identify the pitfalls.
Persumably if you’re investing for a living, you can make your own portfolio asset allocation decisions based on a lot more than a “rule of thumb”. Personally I wouldn’t go over 1/3 in one position / trade, and for that I have very high standards but I’ve done it once a year or so if the right opportunity came along. Most of the time I’m well below 5% unless you count my short cash position :).
This is the first year I’ve had enough for a taxable account so I’m obviously a novice. I DCA some into SCHB and also took a stab at AMZN, GOOGL, and APPL. Unfortunately I bought them around their all time high prices. At least I followed the 5% rule, so it won’t kill me if those stocks plummet more. I think I’ll stick to SCHB for a while.
I think the 5% bet limit is a good rule of thumb unless you’re Xerty. And his process is a lot better than “I think Apple is going up this year so I’ll allocate 10%.”
I mean 5% of your net worth. You can have a concentrated portfolio if the whole thing is a small fraction of your total assets.
I wasn’t thinking or I would have updated this on Monday. I went very long in BABA and AAPL. I still think at the levels they are today they are good long term holds. On Monday they were a screaming deal. AAPL especially. I think there is a 20% upside this year alone with AAPL.
Also T is now my largest single hold. I am using it as a CD with a stop loss. I got stopped out a couple of weeks ago and I bought back in for about a 5% discount. Yield still around 5.5% and a forward PE around 10.
