nottheaverageactuary

Actuarial news and views from Cape Town and beyond

Investing Rule of Thumbs

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Some interesting rule of thumbs that individuals can use for investment.

  • “120 Minus Your Age” Rule. The percent that you should typically invest in stocks is 120 minus your current age. That is for a 22 year old, 98% of their portfolios should contain stocks.
  • 10, 5, 3 Rule. This is a handy rule that states that you can expect a nominal return of 10% from equities, 5% return from bonds and 3% return on highly liquid cash and cash-like accounts. Of course, this is a an average return over the long haul.
  • Don’t buy a house that costs more than 3 years’ worth of your gross annual income. Some variations say no more than 2 years; others say 2.5 years.
  • 4% Withdrawal Rule. In order to protect your principal when you start withdrawing from your investment portfolio, use the 4% rule to figure out how much you can take out.
  • To retire comfortably, your investments must generate 70% to 80% of the income you received while working. or;
  • Save 20 times your gross annual income for retirement
  • Your emergency fund should equal 6 months’ worth of household expenses.
  • You should have at least 5 times your gross salary in life insurance coverage.
  • The 20/4/10 rule for buying a vehicle. When buying a car, you should put down at least 20 percent. You should finance the car for no more than four years and spend no more than ten percent of your gross income on transportation costs
  • The Rule of 72 states that you can divide the number 72 by whatever yield you are getting to see how long it would take for your investment to double.

It must be noted that these are just general rule of thumbs and do not apply accurately in every situation due to changing market conditions. Here are the links for more information:

http://www.marketwatch.com/story/4-financial-rules-of-thumb-in-need-of-upgrades-2014-01-17?page=2

http://www.bankrate.com/finance/retirement/8-rules-of-thumb-on-saving-and-retirement-5.aspx

http://twocents.lifehacker.com/10-good-financial-rules-of-thumb-1668183707

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One thought on “Investing Rule of Thumbs

  1. Thanks for this post Adnan. Here is an interesting article I like on investment quotes by Warren Buffett: http://businesstech.co.za/news/general/50364/11-warren-buffett-quotes-on-investing/

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