As an investor you will find many products and many options to invest in. The 5% rule says as an investor, you should not invest more than 5% of your total portfolio in any one option alone.
This simple technique will ensure you have a balanced portfolio. Why this is useful is that if you invest in any one product a lot, and if that product ends up making a loss, your financial planning will suffer. You may end up losing your wealth or even your capital.
To avoid such a risk, follow this mantra, of devote no more than 5 per cent of their portfolio to any one investment asset. This concept is also known as the "investment allocation rule."
So while investing in different assets classes or products, ensure you do not over invest in any one option, but rather balance your investment across different products.