7 Golden Thumb Rules of Investing

Investing...sounds fancy, right? But let's be real, it also feels threatening. Don't worry, we've all been there! That's why we are here to share 7 golden thumb rules that'll turn you from novice investor to professional trader

Rule 1: The Power of 72

Imagine planting a magical money tree, the Rule of 72 helps you estimate how long it takes for your money to double under compound interest. Just divide 72 by your expected annual return rate, and woah, you have the number of years for your wealth to magically double. Simple, right?

Example:

You invest Rs. 10,000 with an expected 10% annual return. Apply the Rule of 72: 72/10 = 7.2 years. That means your Rs. 10,000 can potentially grow to Rs. 20,000 in just 7.2 years! Talk about the power of compound interest!

Note:

Look for investments with higher, sustainable interest rates to take advantage of Rule 72's magic.

Rule 2: Rule of 114 and 144 

Putting all your eggs in one basket is risky, isn't it? The same goes for investments. The Rule of 114 (100 minus your age invested in stocks) and 144 (100 minus your age invested in bonds) guide you on diversification. By following these rules, you spread your investments across different asset classes like stocks and bonds, reducing risk and protecting your hard-earned money.

Example:

You're 30 years old. Following the Rule of 114, you should ideally invest 70% (100-30) in stocks and 30% in bonds. This balance minimises risk while offering growth potential.

Note:

Remember, these are just guidelines. Consult a financial advisor for personalised advice based on your risk tolerance and goals.

Rule 3: Minimum 10% Investment Rule 

Think of this rule as your investment fitness plan, aim to invest at least 10% of your monthly income consistently. Treat it like paying yourself first, and watch your wealth grow steadily over time.

Example:

You earn Rs. 30,000 per month. Invest at least Rs. 3,000 (10% of your income) every month. This might seem small initially, but with consistent investments and the power of compound interest, you'll be surprised at how quickly your wealth can build.

Note:

Start small, but start now! Even small, consistent investments can make a significant difference in the long run.

Rule 4: 100 Minus Age Rule 

As you age, your risk tolerance should change. The 100 minus age rule suggests investing a higher percentage in bonds (safer assets) and a lower percentage in stocks (riskier assets) as you get older. This ensures financial stability while still offering some growth potential.

Example:

At 30, you can be more aggressive with your investments. Following the rule, you can invest 70% in stocks and 30% in bonds. But at 60, your focus should shift towards stability. The rule suggests a 40% stock and 60% bond allocation.

Note:

Remember, this is just a guideline. Adapt it based on your individual circumstances and financial goals.

Rule 5: Emergency Fund Rule 

Imagine investing all your money, only to have a car breakdown or medical emergency. That's why the Emergency Fund Rule is crucial. Aim to save 3-6 months of your living expenses in a readily accessible account before even thinking about investments. This protects you from unexpected financial shocks and keeps your investments safe.

Example:

If your monthly expenses are Rs. 20,000, aim to build an emergency fund of Rs. 60,000 to Rs. 1,20,000 before investing.

Note:

Treat your emergency fund like a safety net, not a piggy bank. Avoid dipping into it unless absolutely necessary.

Rule 6: 4% Withdrawal Rule

Ah, retirement! The golden years...filled with sunshine, travel, and...financial anxiety? Not if you follow the 4% withdrawal rule! This rule suggests withdrawing only 4% of your retirement savings annually during retirement. This ensures your savings last for your entire retirement phase, allowing you to live comfortably without depleting your nest egg.

Example:

You retire with Rs. 1 crore in savings. Following the 4% rule, you can withdraw Rs. 4 lakh (4% of 1 crore) per year without worrying about depleting your savings significantly.

Note:

Remember, the 4% rule is a guideline, not a strict formula. Adapt it based on your life expectancy, lifestyle needs, and other income sources. Consulting a financial advisor can help you tailor this rule to your specific situation.

Rule 7: Master the Art of Patience 

Successful investing takes time, discipline, and patience. Don't get swayed by market fluctuations or tempted by overnight success stories. Stay invested for the long term, focus on your goals, and avoid impulsive decisions. Remember, patience and discipline are your greatest allies in the investment game.

Example:

Imagine investing Rs. 10,000 in a mutual fund. During market dips, you might see your investment fluctuate, even dipping below Rs. 10,000. Don't panic and sell, maintain your composure, stick to your investment plan, and trust the power of time and compound interest. Over the long term, your investment is likely to recover and grow significantly.

Note:

Develop a diversified portfolio, invest consistently, and avoid emotional decisions. Time will be your best friend in the investment journey.

Conclusion:

Conquering the world of investing doesn't require any major degree and years of experience. All you need is to just get started along with the guidance by the best stock brokers around you and these 7 golden thumb rules, a sprinkle of patience, and a dash of common sense. Start small, stay consistent, and let the power of compound interest work its magic. Remember, investing is a journey, not a destination. Enjoy the process, learn from your mistakes, and be prepared for the ups and downs with these rules guiding you.

Frequently Asked Questions:

Q. 1 What is the best stock broker for beginners?

Ans: The "best" broker depends on your individual needs and experience. Research different brokers based on fees, services offered, and investment options. Look for user-friendly platforms, educational resources, and reliable customer support.

Q. 2 How much should I invest every month?

Ans: Start with a small, manageable amount, like 10% of your income. As your income and financial knowledge grow, you can gradually increase your investments.

Q:3 What if I can't afford to invest right now?

Ans: Even small contributions add up over time. Focus on building your emergency fund first, then start investing when you have some financial cushion.

Q:4 What if I make a mistake in my investments?

Ans: Don't be afraid to make mistakes. Everyone does. Learn from them, adjust your strategy if needed, and seek professional advice if necessary.