In the world of investments and stocks, nothing is perfect and you cannot calculate till the last decimal. You can however plan and predict, rely a bit on chance and knowledge. Thumb rules have always served us well, and even though no thumb rule is accurate to the T, rest assured, you can use it, modify it according to your requirements and put it to good use so that you can make wiser investments and earn higher returns.
These are the 5 Thumb Rules that you must follow in the world of investments:
4% Withdrawal Rule:
You can apply the 4% rule when you want to protect your principle amount while withdrawing it from your investment. You take out 4% of your portfolio in the first year including dividends, interests as well as withdrawals. You do the same thing next year, only you also keep the inflation in mind as well. You will have to adjust the rule according to the inflation and your retirement age. But it is a pretty reasonable rule that will help you determine how much you can take out from your account.
120 Minus Your Age Rule:
According to the older version of this rule of thumb, the rule was to take your age and subtract that from 100 but now, with higher life expectancy, it is safe to assume 120.With longer lifespans and longer retirements, you can afford to take higher risks while investing in stocks. You can have most of your equity allocation in the form of ETFs or index funds consisting only of stocks, equivalent to 120 minus your age percentage of your portfolio. What the intention of this rule is, is to provide you with the incentive to take risk for higher returns.
The 10, 5, 3 Rule:
This thumb rule states that you can basically expect 10% returns from equities, 5% from bonds and 3% from cash accounts. This is a nominal return calculation and is the average based on the long term. If you are conservative in nature and if you consider the nature of the market at hand, then 8, 5, 3 is more likely to be achievable. Even though some feel that equities offer lower average returns, what you should know is that returns fluctuate every year.
Rule of 72:
According to this rule, if you can divide the number 72 with the yield you are receiving, you can find out the time it would take for your investments to double up. If you are earning 1% interest in a stock, then it would take 72 years for the amount you have invested to double. But if you are earning 4.75% on the stock, it would take 15 years to double. ETF works in the same way as well but you would have to figure out the number on a 5 year or 10 year average because they tend to change.
20x Gross Annual Income Needed for Retirement:
If you are planning for your retirement, a simple rule of thumb would be to gather a corpus that is 20 times your gross annual income. If you earn Rs. 5 Lakh every year, then you will need Rs. 1 Crore to retire. However the rule tends to focus on the income rather than your expenses. But it is a good starting point so that you can modify it according to your expenses.