The “Rule of 10, 5, 3” is a simple guideline used in investing to evaluate the potential risk and return of an investment opportunity. Here’s how it works:
Rule of 10: This refers to the idea that no single investment should represent more than 10% of your total investment portfolio. Diversification is key to managing risk in investing, and by limiting exposure to any single investment, you can mitigate the impact if that investment performs poorly.
Rule of 5: Within any single investment, you should aim to limit your exposure to any one sector to no more than 5% of your total portfolio. This further diversifies your investments and reduces the risk of sector-specific downturns impacting your portfolio significantly.
Rule of 3: Finally, within any single sector, it’s advisable not to have more than 3% of your portfolio invested in any one company. This guards against the risk of a single company’s poor performance affecting your overall investment returns disproportionately.
By adhering to these rules, investors aim to spread their risk across a range of investments, sectors, and companies, thereby enhancing the resilience of their portfolio to market fluctuations and unforeseen events. It’s important to note that while these rules offer helpful guidelines, individual circumstances and risk tolerances may vary, so they should be used as part of a broader investment strategy tailored to your specific goals and preferences.
One comment
CB Tiwari
June 22, 2024 at 1:32 pm
Excellent articulation, brief and to the point.