The 10 Percent Risk Rule

Video Transcript

Hey, I'm Chris with Money Burst, and investing is something that we're all going to have to do. But sometimes, when maybe we're feeling like we're behind, or we're just getting a little impatient, we can want to just go out there and swing for the fences, and try to get rich quick with a few risky bets. And look, investing of any kind is going to come with risk, but not all risk is created equal. So, let's talk about taking on risk responsibly.

So, when you're ready to invest, you want to implement something I call the 10% Risk Rule. And this basically is just limiting your risky investments to no more than 10% of the total money you have invested. Let's say you have $50,000 invested. And we're not counting money in, like, a checking or savings account, this is just money we know is actually going to be invested. And this money is spread across, like, retirement accounts or brokerage accounts, or maybe even a crypto wallet. What you want to do is limit yourself to $5,000 in risky investments because that's exactly 10% of that $50,000.

A risky investment would be things that are a little more maybe speculative or unknown, or some people might even consider a gamble, depending on who you're talking to. This would be things like cryptocurrencies. NFTs at a point in time were very popular, I don't really hear people talk about them as much these days. Day trading - when people buy and sell stocks in the same day - or even investments into IPOs, which are initial public offerings, and that's just when a company offers stock for the very first time.

If at any point in time, the money you have put into these risky investment’s crosses 10%, you have to promise to sell enough to get yourself back down to 10%. The idea behind this is if things go wrong, and they go completely opposite of how you thought they were going to, and you end up losing all that money that was put into those risky investments, it's only 10% of your money, right? You still have another 90% sitting over there in other things.

This is opposed to maybe saying, you know what, I'm going all in, I'm putting all this money into my favorite cryptocurrency. Or, I know this new company's issuing stock and it's going to grow, it's going to be great, I'm going to get rich off of this. If that goes poorly, you've basically lost all of your money. So that is the idea behind limiting yourself to 10%.

Recently, I got the chance to speak with Jill Schlesinger, who is a brilliant financial planner, and she related this to going to a casino. Say for example, you're like all right I'm going in and I'm only going to use this $100 bill I got right here, and if I lose this money, that's it, it's done. I'm not going to pull out another $100. The 10% Risk Rule is there to cap you off so that way, you know, look, yes there maybe is potential for more reward if I put more money down, but that money is also going to be at risk. So, I have to choose some point to cut myself off to protect myself and my future.

And if you're like me and you're even more risk-averse, you might want to make it the 5% risk rule so that way you can protect even more of your money. But do what works for you. But my suggestion is cut yourself off at 10% and, you know, enjoy the fun with that, but also build a nice strong foundation for yourself. That way you have some money still working for you consistently, and you can reach your retirement and investing goals.