7 Thumb Rules For Investing

Ask any investor and they will tell you that investing is the key to building wealth and the sooner you start, the better. However, starting out can be intimidating for most novice investors. Whether it be deciding on the timeframe to double your investment or asset allocation, curating a well-rounded investment strategy can be challenging. Thumb rules for investing can offer assistance in this regard. They serve as investment guides, helping simplify the investment process for beginners.

• The rule of 72, 114, and 144 help determine the years your investment takes to double, triple, and quadruple in size, respectively.
• The minimum 10% investment and 100 minus age rules outline how much you should invest and how to allocate your investment.
• The emergency fund rule ensures you have enough saved for a rainy day, while the 4% withdrawal rule ensures that your retired life is sufficiently covered.
• While thumb rules serve as critical investment guides, they do not guarantee results.

Here’s a list of 7 thumb rules that will help you invest better and achieve your financial goals faster:

Rule no. 1: Rule of 72

The rule of 72 is a simple thumb rule that is used to estimate the number of years required to double the invested money at a given annual rate of return. Suppose you invest Rs. 2 lakhs at an expected annual rate of return of 10% p.a. To calculate the doubling time, we divide 72 by the rate of return. Here, the doubling time will be 7.2 years (72/10). It is important to note that this thumb rule for investing applies to those investment instruments that offer compound interest.

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Rule no. 2: Rule of 114

While the rule of 72 outlines the amount of time needed for your money to double, the rule of 114 tells you how fast your investment can triple itself. When using this thumb rule for investing, you can divide 114 by the rate of return to estimate the number of years needed to triple your investment value. Taking the previous example forward, your investment of Rs. 2 lakhs will triple in 11.4 years (114/10).

Rule no. 3: Rule of 144

Carrying the same logic forward, the rule of 144 estimates how long it will take for your investment to quadruple in value. Again, you have to divide 144 by the annual rate of return to accurately estimate the number of years needed to grow your corpus by 4x. Using the same example, your original investment of Rs. 2 lakhs will quadruple in value over 14.4 years (144/10).

Rule no. 4: Minimum 10% investment rule

The 10% minimum investment rule suggests that you should invest at least 10% of your monthly income in long-term investments to capitalise on the benefits of compounding. Additionally, this rule also states that you should progressively increase your investment by 10% every year.

Rule no. 5: 100 minus age rule

This thumb rule for investing is a fairly common one used to determine your asset allocation strategy based on age. According to the 100 minus age rule, you must subtract your current age from 100. The equity exposure of your portfolio should match this resultant number. The remaining balance should be invested in debt. Suppose you are a 28-year-old investor building an investment portfolio. According to this thumb rule, you should invest 72% (100-28) in equities and 28% in debt. This thumb rule in investing works on the principle that your equity exposure should reduce as you age and near retirement.

Rule no. 6: 4% withdrawal rule

Rather than strictly being an investing rule, the 4% withdrawal rule is more focused on helping investors cultivate a disciplined approach. Most investors aim to create an adequate retirement corpus that ideally outlasts them. However, due to unpredictable inflation rates, they risk using this corpus before time. The 4% withdrawal rule states that if you withdraw 4% of your retirement corpus every year, you can ensure a steady income stream for the rest of your life. Therefore, if you have a corpus of, say, Rs. 2 crores, you must withdraw not more than Rs. 8 lakhs per year.

Rule no. 7: Emergency fund rule

This thumb rule for investing deals with the unpredictable financial emergencies that can catch you off-guard. According to the emergency fund rule, you must put aside funds equivalent to at least 3-6 months of living expenses into a contingency account. Building an adequate and easily accessible rainy day fund helps you avoid dipping into your investments or liquidating assets when faced with unforeseen situations like job loss or sudden repairs.

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The thumb rules for investing highlighted above offer guidance and structure for investors looking to simplify the complex investment landscape. By implementing these thumb rules for investing, you can track your progress, estimate your corpus, and streamline investments in general. That said, it is important to remember that thumb rules should never be blindly followed. While useful benchmarks, thumb rules for investing may not always work. Always remember that a good investment portfolio is one that’s tailored to your goals, risk tolerance capacity, and investment horizon.