Investing in the financial markets can indeed seem complex and overwhelming, especially for beginners. However, there are some fundamental principles, often referred to as “thumb rules,” that can serve as excellent starting points for anyone looking to make informed investment decisions. These guidelines help simplify the process and provide a solid foundation for building a successful investment portfolio.So to help you out in your investment journey we are going to explore the top 10 universal thumb rules for investing.
1. Rule of 72
Achieving financial growth is a shared aspiration, often with a desire for swift results. One of the simplest and most practical tools for estimating the time it takes for your money to double is the Rule of 72.
This rule is straightforward: Divide the number 72 by the annual rate of return on your investment, and the result will approximate the number of years it will take for your initial investment to double. For example, consider an investment of Rs 1 lakh in a financial product offering a 6 percent annual rate of return. By dividing 72 by 6, you arrive at 12.
In practical terms, this means that your initial investment of Rs 1 lakh will likely grow to Rs 2 lakh in approximately 12 years. The Rule of 72 provides a quick and uncomplicated means of assessing the potential growth of your investments, making it a valuable tool for evaluating various investment opportunities. Rule of 72 is the basic and one of the top 10 universal thumb rules for harvesting.
2. Rule 114
The financial world often seeks efficient ways to expedite investment growth, and one such tool is the “Rule of 72,” which estimates the time required for an investment to double. However, there’s an equally valuable companion known as the “Rule of 114,” which provides insight into the timeline for tripling your investment.
Similar to the Rule of 72, the Rule of 114 offers a simple and easily accessible method for estimating the time required to triple your investment. Consequently, it offers a quick and valuable approach for evaluating the growth potential of your assets.
However, it’s essential to remember that this rule offers a rough approximation and assumes a consistent rate of return, while real-world investments can involve fluctuating returns, as well as factors like taxes, fees, and inflation. Nevertheless, Rule 114 serves as a valuable tool for initial evaluation, aiding you in making more informed financial decisions.
3. RULE OF 144
The concept of the “Rule of 144” is a straightforward tool designed to estimate the number of years it will take for your money to grow fourfold based on a specific rate of return. This rule serves as an extension of the more commonly known “Rule of 72.”
To ascertain the time needed for your investment to quadruple, you initiate the process with the number 144. Subsequently, you divide this figure by the expected annual rate of return from your investment. As a result, you gain an approximate timeframe within which your initial investment will grow fourfold.
4. Rule of 70
One of the top 10 universal thumb rules for investing is the rule of 70 as this rule is a valuable tool for estimating the future value of your current wealth over a period of 10 or 20 years. Even if you don’t spend or invest a single penny of it, its worth is likely to erode significantly due to the impact of inflation.
To calculate this, you can use the ‘Rule of 70,’ which involves dividing 70 by the current inflation rate. The resulting number represents the approximate number of years it will take for your wealth to diminish to half of its current value.
5. The 10,5,3 Rule
“When contemplating investment decisions, our primary focus often centres on projecting the expected rate of return. The ’10, 5, 3′ rule serves as a helpful guideline for estimating the average rate of return across various investment avenues.
It’s crucial to bear in mind that in the realm of mutual funds, there are no guaranteed returns. Nevertheless, this rule suggests that one can reasonably anticipate an approximate 10 percent rate of return from long-term equity investments, approximately 5 percent from debt instruments, and an average rate of return of about 3 percent from savings bank accounts.”
6. The emergency fund rule
“The ‘100 minus age’ rule provides a straightforward approach for determining your optimal asset allocation, aiding in the decision of how to distribute your investments between equities and debt.
To apply this rule, simply subtract your age from 100. The resulting number represents the percentage of your portfolio that should be allocated to equities. The remainder should be devoted to debt investments. It is indeed one of the top 10 universal thumb rules for investing is the emergency fund rule.
7. 10 percent for retirement rule
“When we commence our careers in our early or mid-twenties, thoughts of retirement often linger in the background. Nevertheless, initiating savings from your very first paycheck, no matter how modest the initial amount, can lay the foundation for a substantial retirement fund. Ideally, this initial savings should constitute 10 percent of your current salary, and you should endeavour to increase it by an additional 10 percent each year.
A highly recommended strategy for building your retirement savings is to adhere to the 10 percent rule, with a particular emphasis on investments in schemes like the National Pension System (NPS).” It is indeed one of the top 10 universal thumb rules for investing.
8. The 4% withdrawal rule
“If your goal is to ensure that your retirement fund can sustain you throughout your retirement years, then adopting the ‘4 percent withdrawal rule’ is a sound strategy. As a retiree, adhering to this rule provides a means to maintain a consistent income stream while preserving sufficient capital to generate returns.
While many retirees consistently follow this rule during their retirement, it also accommodates adjustments to account for inflation. To implement this, you can increase the withdrawal rate in accordance with the inflation rate declared by the Reserve Bank.
9. The network rule
One of the top 10 universal thumb rules for investing is to assess whether one can be classified as wealthy, a straightforward mathematical formula is available. To apply this formula, multiply your age by your gross income and then divide the resulting product by a specific factor. If your net worth is equal to or greater than the quotient, you may be considered wealthy.
In the Indian context, experts often suggest using a divisor of 20 instead of 10. For instance, if you are 30 years old and your gross income is Rs 12 lakh, it is recommended that your net worth should ideally reach at least Rs 18 lakh to qualify as ‘wealthy.’ The network rule is
10. Asset allocation thumb rule
This guideline is focused on helping individuals determine the suitable level of risk within their asset allocation strategy. It suggests subtracting your age from 100 to arrive at the percentage of your portfolio that should be allocated to equities.
For example, if you are 30 years old, you may consider allocating 70 percent (100 – 30) of your portfolio to equities, while dedicating the remaining 30 percent to debt investments. One of the most important thumb rules in the top 10 universal thumb rules for investing is indeed asset allocation thumb rule.
“The term ‘rule of thumb,’ often colloquially referred to as a thumb rule, offers a straightforward and pragmatic approach to understanding and implementing various principles derived from real-life experiences. Nonetheless, it’s crucial to acknowledge that while these rules serve as valuable tools for practical application and can yield favourable results, they should never be considered absolute truths.”