The Rule of 42 is an investing strategy that emphasizes diversification by holding at least 42 different assets in a portfolio. The idea is to spread investments across various sectors and asset types, with each individual holding making up only 2-3% of the total portfolio. This approach aims to reduce risk by ensuring that no single asset has a disproportionate impact on overall performance.
Some investors use this rule to create a balanced and stable portfolio that combines growth potential with risk mitigation. While the number 42 isn’t a strict requirement, the principle behind it is to avoid overexposure to any one investment.
For instance, an investor following The Rule of 42 might allocate:
- 42 stocks across various industries (technology, healthcare, finance, etc.).
- Each stock making up 2-3% of the portfolio, totaling 84%.
- Try to invest no more than 20% in a sector.
- The remaining 16% invested in preferred assets like bonds or real estate for balance.
The book, The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk would be an excellent read.
