15% Portfolio Investment Cap

A discussion about risk management in investing, specifically focusing on the Terra/Luna crypto crash and the importance of position sizing to protect against catastrophic losses.

The Terra/Luna Crash Context

• $48 billion in value wiped out
• Luna went from over $100 to fractions of a penny
• Stable coin UST dropped from $1 to around $0.15
• Many investors lost significant portions of their portfolio

Key Risk Management Lessons

• Never put more than 15% of portfolio in any single project
  • Protects against "black swan" risks
  • Ensures no single investment can destroy your portfolio
  • Particularly important in volatile assets like crypto

Psychological Approach to Large Losses

• Important to go in "eyes wide open" about risks
• Write down investment thesis including what could go wrong
• Accept when risks you identified actually play out
• Focus on making more money rather than dwelling on losses
• Don't constantly check net worth during major drawdowns

Portfolio Construction

• Aim for less than half of liquid assets in high-risk investments
• Maintain diversification across different asset classes
• Have clear position sizing rules before investing
• Document investment thesis and risks for each position

Recovery Mindset

• Use losses as motivation to work harder
• Focus on earning rather than trading during drawdowns
• Accept losses as part of taking calculated risks
• Don't let losses affect your mental health or daily decision making