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8 Rules of Investing

Rahul Verma
May 18, 2023
8 Rules of investing
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Rules are what bind us and make us disciplined and help us reach our desired goals in life. Similarly, there are some rules needed to be followed in Investing for desired returns.

With the right strategies and discipline alongside following the basic thumb rules of investing, investors can record a handsome profit on their employed capital.

There are strategically 31 rules of investing, which we would be discussing later in this blog and each rule has its importance and provide a sense of security to the portfolio. 

These 31 rules are broadly divided into 8 thumb rules of investing which are further divided into three subcategories

  • Rules for Faster and higher returns
  • Rules for investment checklist
  • Rules for wealth management

Follow the following rules with Daulat, invest better, and reach your financial goals!

Why Rules of Investing are important?

Rules are an integral part of our lives, they help individuals build character, accountability, and responsible alongside helping us organize and impart consistency. Similarly, investing rules impart the following characteristics

  • Provide Structure and Guidance: Investing can be overwhelming, especially for beginners. Investing rules provide structure and guidance, serving as a roadmap for making sound investment decisions. They offer a framework that helps you navigate through various investment options, asset allocation choices, and market conditions. Rules act as a foundation on which you can build your investment strategy and make informed choices based on proven principles.
  • Enhance Returns: Investing rules are designed to optimize returns over the long term. By setting clear investment goals, practicing discipline, and staying focused on your strategy, you can avoid impulsive decisions driven by short-term market fluctuations. Consistency, patience, and a long-term perspective enable you to reap the benefits of compounding and potentially achieve higher returns.
  • Minimize Risk: Investing rules help mitigate risks associated with investments. By diversifying your portfolio, conducting thorough research, and managing risk, you reduce the chances of significant losses. Following rules such as setting a stop-loss limit or having an asset allocation strategy helps protect your investments and ensures you are not overly exposed to a single investment or asset class.
  • Long-Term Perspective: Investing rules emphasize the importance of a long-term perspective. They encourage you to think beyond short-term gains and losses and instead focus on building wealth over an extended period. By adhering to rules such as starting early, being consistent, and staying invested, you can benefit from the power of compounding and take advantage of market growth over time.

 

Rules for Faster and higher returns

There is only one norm to achieve faster and higher returns, and that is

INVEST EARLY, AND BEGIN RAISING THE BAR, the following rules will help you decide how to do that

  • Rule of 72: Rule of 72 gives the minimum time required to double down your investment.
  • Rule of 114: Rule of 114 gives the minimum time required to triple down your investment.
  • Rule of 144: Rule of 144 gives the minimum time required to quadruple down your investment.

Formula and Example,

For finding out, the times return on your investment, simply divide the estimated turn rate by your desired times (double, triple, quadruple) return.

Suppose you are investing INR100,000 at an estimated return of 12%. So it would take,

  • 7 years to double down
  • 9.5 years to triple down
  • 12 years to quadruple

 

Rules for investment checklist

Now, as you have calculated the time required for your desired returns, you gotta invest it following these rules and build your portfolio

  • The 10,5,3 rule: When we invest or even think of investing money, the first thing that we usually look for is the rate of returns that we will get from our investments. The 10,5,3 rule helps you determine the average rate of return on your investment. Though there are no guaranteed returns for mutual funds, as per this rule, one should expect 10 percent returns from long-term equity investment and 5 percent returns from debt instruments. And 3 percent is the average rate of return that one usually gets from savings bank accounts.
  • The emergency fund rule: As the name suggests, the money kept aside for emergency use is called an emergency fund. It is a good practice to keep six months to one year’s expenses as an emergency fund. While calculating your expenses you should include expenses for food, utility bills, rent, EMIs, etc. And instead of keeping it idle in savings bank accounts invest in liquid funds. These funds provide a little more returns than savings bank accounts. At the same time, like saving banks accounts, liquid funds are highly liquid, i.e. the money is available on very short notice. 
  • 100 minus age ruleThe 100 minus age rule is a great way to determine one’s asset allocation. That is, how much you should allocate in equities and how much in debt. For this, subtract your age from 100, and the number that you arrive at is the percentage at which you should invest in equities. The rest should be invested in debt.
  • 10 percent for retirement rule “When we start earning in our early or mid-twenties, saving for retirement is the last thing in our mind. But starting to save from your first salary, no matter how little the amount is, you will be able to create a huge corpus for retirement. And ideally, it should be 10 percent of your current salary which you should increase by another 10 percent every year. 

 

Rules for wealth management

Now as you have accumulated wealth, you have to manage it better than your investment checklist to sustain your retirement life, it could be done by following rules

  • The 4% withdrawal rule: If you want your retirement fund to outlast you, then you should follow the 4 percent withdrawal rule. As a retiree, if you follow the 4 percent withdrawal rule, it will ensure that you have a steady income stream. At the same time, you have enough bank balances on which you earn enough returns. For example, let’s suppose, you have a Rs 1 crore retirement corpus, and you should withdraw Rs 4 lakh from it every year, ie Rs 33,000 every month. Now some retirees follow this rule for the entire retirement years, but the rule also allows you to increase the amount owing to inflation. For this, you can increase the withdrawal rate by the inflation rate declared by the reserve bank. Let’s understand this with an example.  Suppose your retirement corpus is Rs 1 crore, and the inflation rate is 5 percent. So if you withdraw Rs 4 lakh in the first year, you should withdraw Rs 4 lakh 20 thousand in the second year and Rs 4 lakh 41 thousand in the third year. That is every year you should increase the withdrawal amount by another 5 percent (which is considered as the inflation rate).

 

Conclusion

These thumbs rules are the basic guide for investors, starting their investment journeys. Investors are advised to abide by the rules for desired returns but it can be altered according to the risk appetite and financial obligations of the investor.

Frequently Asked Questions

  • Can the rules of the investment checklist be altered?
    • Investors are not advised to alter the rules, but they can be altered. It all boils down to the risk appetite.
  • How to check, whether am wealthy or not?
    • Multiply your age by your gross income and then divide it by 10. If your net worth is equal to or more than the remainder, then you can be called wealthy.
  • How to calculate net worth?
    • Difference between the summation of all your assets and liabilities.
  • How can Daulat help?
    • Daulat will help you with the investment checklist and wealth management.

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