How much should ONE asset represent in your net worth?

Reader,

What’s your answer?

I’m talking about a single stock, house, car, or business. Not talking about an index fund, which is automatically diversified, and I don’t care about something like jewelry which rarely represents any sizable percentage of net worth.

Before you read on, what’s your answer? How much should ONE asset represent in your net worth?

OK, you can read the answers here.

The answers ranged from about 5% — someone who is a fan of diversification — to 500% (they’re talking about using leverage).

My favorite “I am a very badass” answers were the ones that said, “99.99%, definitely.”

Which is what I want to talk about today, because A LOT OF YOU DON’T UNDERSTAND RISK MANAGEMENT AT ALL.

Risk management means you don’t just focus on what can go RIGHT — you also focus on what can go WRONG. People hate thinking about this. They hate flossing, they hate discussing prenups and creating a will, and they hate buying insurance. But it’s important.

Allow me to translate what these people really mean.

Random person: “I definitely think a single asset should represent 99.99% of your net worth. That’s how Charlie Munger and Warren Buffett did it. It’s called concentration, you loser. You need to go all in when the time is right!”
What they’re really saying: “99.99% (if it’s an asset that’s exploding and making me rich).”
Ramit’s commentary: In my experience, those very same people have never considered the flip side — that the asset could decrease in value and 99% of their net worth could vanish in months. If I ask them, “What if your asset drops by 70% in 3 months?” this is the response I will get:

Random person: “It depends.”
What they’re really saying: “I have not spent 30 seconds thinking of this so I’m unable to give you even a ballpark range, but I feel the need to say something so you know how smart I am, so I will give you a worthless generic answer.” 
Ramit’s commentary: NEVER ANSWER WITH “IT DEPENDS.” WE KNOW IT DEPENDS. HEY GUYS, SHOULD I BREATHE OXYGEN? WELL IT DEPENDS...WHETHER I WANT TO BE ALIVE. NEVER SAY “IT DEPENDS.” TELL US WHY IT DEPENDS AND TELL US YOUR ANSWER. I hate this fucking answer so much. 

Now, you might be wondering what my answer is.

Well, it depends.

LOL, just kidding. My answer — for myself — is 25%. I have a rule that no single asset should represent more than 25% of my net worth.

This means if I buy a house, it should represent no more than 25% of net worth. Same for a stock. My biggest single stock represents less than 5% of my net worth.

As you become more advanced in personal finance, it becomes important to have benchmarks.

These benchmarks keep you within parameters, helping to ensure you’re not overspending — or underspending — in key areas. You can always change your parameters based on lifestyle or portfolio size, but it’s helpful to have a few key rules.

These rules exist for lots of things. For example, did you know that there’s a rule for how much house you can afford? 

Your benchmarks may change over time. For example, if I was 20 years old and had a net worth of $2,000, then buying a used car would represent over 50% of my net worth. Earlier on in your career, the numbers may be higher. That’s fine — as long as you’re conscious of them and have a plan for what happens if things go bad.

Warren Buffett will not have the same benchmarks as you. He could buy the most expensive house in America and it would not represent even 1% of his net worth. This is why you shouldn’t try to directly emulate billionaires’ financial habits.

Benchmarks are helpful in very good and very bad times. Benchmarks are important to understand, especially now, because a lot of people think they’re investing geniuses due to an 11-year bull market. 

Let me show you an example: If you invested in Tesla and it now represents 35% of your portfolio, what’s more likely? 

1. That you’re going to step back, dispassionately analyze your portfolio, recognize that you’re overweight in a single stock, and rebalance by selling?
2. That you’re going to read an anonymous loser posting in /WSB with a yogurt stain on his collar telling you it’s GoInG tO ThE MoOn and invest even more in Tesla?

Exactly. This is why we have benchmarks that are set up beforehand. IT’S CALLED RISK MANAGEMENT, PEOPLE. YOU’RE MANAGING AGAINST YOUR OWN STUPID BRAINS, WHICH WANT TO TRICK YOU. IT ALL WORKS GREAT...

...UNTIL IT DOESN’T.

What about if you have a business? This is another thing that drives me insane. Business owners love to believe their business should represent a huge percentage of their net worth. They use two quotes to justify it: 

1. “Why would I invest in the stock market? I can make more money putting it back into my business!”
2. “Jeff Bezos has 99% of his wealth in Amazon!”

Just a couple notes, my friends:

1. You are not Jeff Bezos.
2. FUCKING DIVERSIFY. How many businesses last more than 50 years? Why are you so confident yours will?

Personally, I don’t even count my business in my net worth. But I have my personal rules about taking profits and investing in the market. 

Ask what can go RIGHT — and what can go WRONG. Amateur investors ask themselves, “How much risk am I willing to take on?” American culture encourages this Wild West thinking, leading people — especially young people, especially young men — to answer by saying, “I LOVE RISK!!! THE MORE, THE BETTER!” 

That’s all great, until the market drops 30% and suddenly they realize they’ve lost their entire life savings, their job, and can’t afford the mortgage on their house. You can see this in investment threads from 2008 and even March 2020 — a decrease in the stock market, and suddenly these tough talkers folded.

In short, be smart, plan for what can go right and wrong, and never ever answer a question with “It depends.”