Basic Thumb Rules Of Investing

Investing can be complex, but following some basic thumb rules can help you make informed decisions. Check out this post to learn the basic thumb rules of investing, including diversification, asset allocation, and risk management. Discover how to create a solid investment portfolio that aligns with your financial goals and risk tolerance.

Investment is a simple but continuous process. It is a slow but steady process with perfect planning and self discipline. We all know the great saying 'Rome was not built in a day', so is the case of wealth creation. Wealth can not be created overnight. It is created by hard work, patience and planning. If anyone wants to create wealth and achieve her future financial goals she has to follow some basic, simple and consistent rules with discipline and patience.

In this post we want to explore some basic thumb rules of investing which are very important for an individual to plan for her future goals. These are very simple formula that investor tend to use to help them make their investment decision better.

RULE OF 72: [T=72÷R]

The rule of 72 is a fast and very useful formula that is popularly used to anticipate the number of years needed to double the invested amount at a fixed rate of annual interest. In layman's language this rule is used to find out how long it will take to double your money.

For example; take 72 as a number, and divide it by expected rate of interest you hope to get from your investment. The answer will be the time duration it will take to double itself. 

The formula is T=72/R Here, 

T = Time duration

R = Rate of expected interest

Suppose you expect to get a return of 12% per annum, then 72/12 = 6. So it will take 6 years to make your investment to double if the rate of interest is 12% p.a.

RULE OF 114:

This rule is same to the rule of 72 except for one difference. Rule of 114 is used to calculate how long it will take to triple your invested amount.

Take the number 114, divide it by the expected rate of interest. The answer will be the time duration in which your amount of investment will be tripled.

Suppose the rate of interest is 12% per annum, then 114/12 = 9.5

So it will take 9.5 years to triple your money if the rate of interest is 12% p.a. 

RULE OF 144:

There is also a rule of 144 similar to Rule 72 and Rule 114. This is used to calculate how long it will take to increase your investment value by 4 times. Formula for 144 is same as previous two formulas. Here we divide 144 by expected rate of interest. The answer will be the approximate time duration it will take. 

100-AGE RULE:

The 100-age rule of asset allocation is a simple guideline to the investor to decide how much of their investment should be deployed or allocated to each asset class on the basis of their age. This rule of 100-age helps the investor to determine how much of their money should be invested in equity asset (shares, equities, mutual funds) and how much in safer assets like Fixed Deposits and Debt Funds.

The rule states that an investor's portfolio must contain 100 minus their age in stock/equities and the remaining amount in FDs and bonds.

For example; if someone is 30 years old, then 100 - 30 = 70. So, as per rule the person should invest 70% in equity and rest 30% in debt or FD.

If an investor is 40 years old, she should invest (100 - 40 = 60) percent of his portfolio in stocks and rest 40% in safer assets. 

4% RULE:

There is also a 4% rule that tells about how to handle money after retirement. From your investment take only 4% every year as your expenses. 

So if you have invested Rs.50lakhs at the time of your retirement, you can take out 4% p.a. which will be Rs.2lakhs p.a. or Rs.16666 per month. That is the actual income after retirement.

It should be noted that these are simplified calculation and may not always accurately reflect the actual time.

Disclaimer: The articles published here is for educational purpose only. We do not recommend any one to invest in any instrument in stock market. Before investing kindly consult your financial adviser. 

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