Are thumb rules of investment good to follow?

Let’s look at some of the thumb rules and then help you decide which ones are suitable for you and which ones are not.

May 28, 2017 04:05 IST India Infoline News Service

You might have heard or read about few thumb rules of investments. You may or may not have followed these thumb rules, depending on whether the particular rule is suitable for you. So how do you decide whether you follow these thumb rules or ignore them go by your own judgement? Let’s look at some of the thumb rules and then help you decide which ones are suitable for you and which ones are not. Here we go:
 
Thumb Rule 1: 100—Age = Equity Exposure
 
This is the most common thumb rule cited when it comes to allocating funds into debt and equity. But this rule may not be appropriate for a person of, say, 25 years of age who has some crucial financial goal to achieve, such as getting married after 2-3 years or buying a house by the age of 30. If this person invests 75% of his savings in equity, he exposes his portfolio to the high risk of market volatility. If the stock market crashes, he would suffer financial loss that might hamper his plan to get married or buy a house. Hence, in the given financial situation, this thumb rule can create problem. So, depending on one’s financial goals and needs, one should decide on the appropriate allocation of funds into equity and debt instruments.
 
Thumb Rule 2: The Rule of 72
 
The Rule of 72 helps you to estimate the number of years required to double your money at a given annual rate of return. Hence, if the rate of return is 8%, the number of years taken to double your money is 72/8= 9 years. Or, conversely, if an investment adviser claims that the money invested in a debt plan will double in 8 years, the rate of return should be 72/8 = 9% p.a. However, the more precise rule is the Rule of 69. Hence, for doubling your money in 8 years, the rate of return will have to be 69/8 = 8.625%, which means that the actual rate of return on your investment will be 8.625% and not 9%.
 
Thumb Rule 3: Invest minimum 10% of your income
 
It is better not to follow this rule because investing 10% of your income is just not enough. The more appropriate rule (or habit) would be to invest at least 20-25% of your income. The more you invest the more your corpus would grow over time and it would grow at a faster pace with the power of compounding. This would help you to achieve all your financial goals early in life.

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