Finance Tip Friday #6: The TWO Rules to Stock Market Investing

Chart Arrow Businessman Stock  - mohamed_hassan / Pixabay

Interested in investing in the stock market? Already investing in the stock market?

Then you want to decrease your overall risk of investing into it. A well-diversified portfolio builds financial redundancy into your life and will help mitigate any future problems!

Here are the 2 key rules to investing in the stock market:

  1. Never have 5% or more of your entire portfolio in just one stock. People who put all their money into Tesla and Facebook stock are fools. If the company sees a big drop in their stock price, then your entire portfolio declines.
  2. Don’t have more than 20% of your portfolio in one sector or index fund. For example, don’t invest more than 20% of your entire portfolio into just technology stocks/funds or energy stocks/funds. This would essentially be investing into 5-6 different index funds, which is an easy portfolio that anyone can manage on their own (discussed in the financial independence and investment course just FYI).

If you follow these 2 basic rules, you will have a well-diversified portfolio that would not get slaughtered during an economic downturn. There are always sectors that do not see a big decline during recessions, therefore if you have a diversified portfolio, those investments will keep you afloat while the other ones rebound. That is the key to long term wealth building in the stock market.

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