Ten evergreen thumb rules on investment


Are you a new investor? Do you invest without understanding the nuances of investing? This is not proper. In this article, ten simple rules have been discussed. Understand these rules and follow them. Your investment will give you a handsome return to have a hassle-free retired life. Read on to know.

Why do you invest? The simple answer of this question is investment is necessary to fulfill various goals like purchasing a flat or a house, higher education of children, marriage of children and finally to have a comfortable retired life. All of us try to invest but most of us do it without much knowledge or understanding. We must have a good idea of the return which our investment would give. Moreover for systematic investment we must keep aside an amount every month from our salary. But how much is sufficient? In this article we are going to discuss ten traditional thumb rules relating to investment. This is for those persons who invest blindly without much understanding. Let us know these ten thumb rules on investment.

First Rule: Pay ourselves first

Right from receiving first salary, every person must put away something for his/her retirement. Financial expert say that minimum ten percent of a person's income must go for retirement saving. It is also important to increase the amount when income rises over the years. So, if a person earns Rs. ten thousand per month, he/she must save at least Rs. one thousand per month for retirement. This amount must be increased with the increase in salary.

Second Rule: Rule of 72

This old rule tells us how much time it would take to double the invested amount. We are required to divide 72 by the interest rate at which our invested money is being compounded. This will give the time in terms of number of years required to double the invested amount. For example, if the rate of compound interest is 9% then it would take 8 years (=72/9) to double the invested amount.

Third Rule: Rule of 114

This rule is similar to the previous rule of 72. It indicates how much time it would take to triple our invested amount. In this case we are required to divide 114 by the rate of interest. So, if the rate of interest is ten percent per annum, it would take 11.4 years (=114/10) to triple our invested amount.

Fourth Rule: Rule of 144

This rule indicates the time in terms of years to quadruble our invested money. In this case we are required to divide 144 by the rate of compounded interest to find the number of years which is required to quadruble our invested amount. If the rate of interest is 12%, then our money will become four times the present amount in 12 years (=144/12).

Rule Five: How fast will the corpus erode?

This is a very useful rule for understanding our future buying power. According to this rule, we are required to divide 70 by the current inflation rate. The result would indicate how fast our investment would reduce to half its present value. If the current rate of inflation is ten percent, then after seven years (=70/10), our invested amount will become half. However, it may be remembered that rate of inflation changes very often.

Rule Six: Should we consider ourselves wealthy?

Multiply your age with your pre-tax income. The product may be divided by 10. It would give your actual/real networth. If a person is 30 years old and earns Rs. 3 lakh per year (pre-tax), than his/her networth would be Rs. nine lakh. However, Indian financial experts argue that the divisor should be 20 (instead of 10) considering the financial standard of Indian people.

Rule Seven: The emergency fund rule

Every salaried person must put away at least six months' worth of expenses in a liquid savings account in order to ensure its availability at short notice in emergencies. This rule must be remembered by young people, because generally young people don't think about emergency situations.

Rule Eight: Hundred minus age rule

This rule talks about asset allocation. This is a very old and popular rule. This rule states that if a person's age is 40 than he/she must keep 60% (=100-40) of his/her investment amount in equity. This rule also implies that with advancing age, a person should systematically downgrade his/her equity allocation.

Rule Nine: 4% withdrawal rule

This rule tries to find the answer to the question of the desired amount of withdrawal after retirement. According to this rule, to ensure that a person's corpus outlasts his/her life span, he/she should not withdraw more than four percent of the corpus in a year.

Rule Ten: 10, 5, 3 return

This simple rule states that a person can realistically expects ten percent return from equity, five percent return from bonds and three percent return from liquid cash.

Conclusion

These simple but age-old rules are extremely useful to guide new and inexperienced investors to systematically invest and enjoy the fruits of investment after their retirement/working life.


Related Articles

How to invest in the right manner

This article gives information about various ways to invest money in India. It provides suggestions about various investment avenues, useful tips on how to save money and how such saving methods can make you wealthy.

What are the investment options for women?

The most vital factor that plays an important role for investment is the risk taking the capacity of the investor i.e. how far can he go to take risks because upon it rests to a greater extent the likely returns. Well, let’s see the investment options available after taking into account the risks involved.

Five business ideas to start in rural areas of India

This article provides the business ideas for people living in rural area or those who want to start a business in village. These businesses can prove to be lucrative in long run and can be started by both men and women. A little knowledge and management skill is sufficient to start the business. There are lot of government schemes which provides loan on low interest so that people living in rural area can start their own business.

Mutual Funds in India – How to make a profitable investment portfolio

Are you looking for information on what mutual funds are or how to invest in mutual funds? Do you want to know which mutual funds to invest in ? You need look no further. Read on to know all about the best mutual funds to invest in India. Learn tips on how to create the perfect portfolio that will make your investment grow.

Real estate is the best long term investment

Irrespective of the ongoing economic slump or the recent crisis, real estate still is the best, long-term investment. Looking at back 30 years, real estate is still valued much higher than it ever was. And when you have tenants paying for your mortgage, it makes the investment that much more sensible and profitable. This article lists the benefits of the real estate investment.

More articles: Investment tips Long Term Investments Best Investment Plans Finance miscellaneous

Comments

Author: DR.N.V. Srinivasa Rao28 Apr 2017 Member Level: Diamond   Points : 3

A very good and useful article by Mr. Partha. The points he has given are very useful and we can understand what we are planning is correct or not.

Generally when we invest we should see the safety of our investment also. If we invest in shares you may get very quick money. But risk is there. Basing on our earning capacity only and that too a part of our savings only should be invested in shares. Nowadays many SIPs are being floated. We can also invest in this but we should go with a proper understanding of the fund in which we are investing.

Author: umesh29 Apr 2017 Member Level: Gold   Points : 1

A very concisely written article with easy to use layman formula and crisp explanations. Worth reading for retired fellows.

While going through rule nine I found that it is mentioned there - 'to withdraw 4% of total corpus per month'. The author may check if this is a typographical error or not, as I think that it should have been 'per year'.

Author: Partha Kansabanik30 Apr 2017 Member Level: Diamond   Points : 0

Mr. Umesh: Sincere thanks for pointing out the mistake. This mistake was due to my own fault. I posted the article in a hurry. I request the editor to replace 'month' (the last word of the tenth para) with 'year'.

Author: Juana03 May 2017 Member Level: Platinum   Points : 7

James O’Donnell ‘invented’ the 10-5-3 rule. His book titled - ‘The Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count’, makes an interesting read, but doesn’t really give many convincing solutions. Investments are subject to risks, and we all know that. So, when risks are involved returns cannot be guaranteed. There can be no realistic expectations.

Here are a few points that I think need mention, especially when investments are being discussed –

1. The 10-5-3 calculation is based on average annual returns on long-term investments, spread over a period of 15-20 years. Investors must be willing to take risks for continued periods.
2. I see some drawbacks, as there can never be thumb rules for investment without the risk of loss. As mentioned earlier the returns are based on long-term averages and are not the norm. A bearish run can send the markets and the calculation in a tizzy. The rule doesn’t take into account volatile markets. If there is a bear run, the investment can drop substantially, making it quite an uphill task for the investor to recover their losses.
3. Further, the 10-5-3 rule doesn’t cater to inflation and the depreciation of the rupee.
4. There are taxes to be paid on the earnings, which the rule doesn’t cover.

Author: Partha Kansabanik03 May 2017 Member Level: Diamond   Points : 5

Read the excellent and erudite comments of Ms Juana. My response is as under:-

(i) I clearly mentioned in the first Para of my article: "This is for those persons who invest blindly without much understanding. Let us know these ten thumb rules on investment." These are only thumb rules for those people who invest in various instruments without much understanding. They are prone to cheating.
(ii) The 10-5-3 return rule for equity-bond-liquid cash is not for short-term. This is an average-based formula calculated over the years. The short-term return of any investment instrument can't be stated, especially in the case of equity because of volatility.
(iii) No investment guru, including Benjamin Graham, Warren Buffett or Rakesh Jhunjhunwala, can indicate the risk-adjusted return. No software has been developed so far to predict risk-adjusted return. Moreover, the risk is inherent to all investments.
(iv) All the returns indicated everywhere in the world are pre-tax returns. This is because post-tax return varies from person to person everywhere in the world.

I thank Mr Rao, Mr Umesh and Ms Juana for going through this insignificant work.

Author: Juana03 May 2017 Member Level: Platinum   Points : 3

The fact is that there are a lot of people out there who believe the spoken/written words. They do not think it prudent to either use logic or carry out research. If you notice there is an advisory included in every Mutual Fund advertisement that warns prospective investors, of the risks. That advisory was made mandatory because there were people who believed MFs to be a quick and safe way for getting rich.

My comments were aimed at people who invest blindly, they are the ones who need to understand the points I raised about depreciation, volatile markets and risks involved. They are the ones who take things at face value, without doing the math.

There are many financial instruments with tax-free returns. It is in that context that the reader was advised about taxes. Not everyone understands the basics of finance.

Author: Swati Sarnobat30 May 2017 Member Level: Gold   Points : 2

If you want advice about investment, then seek advice from professionally competent or financial professionals. Know your financial capacity and present financial condition. You must be able to predict your future financial condition also based on the condition today. Know the theory of leverage, market fluctuations and money market.



  • Do not include your name, "with regards" etc in the comment. Write detailed comment, relevant to the topic.
  • No HTML formatting and links to other web sites are allowed.
  • This is a strictly moderated site. Absolutely no spam allowed.
  • Name:
    Email: