Rules of Investing
Investing can often seem intimidating to beginners, and even experienced investors sometimes struggle with the complexity of financial markets. With multiple investment options available, dynamic market conditions, and the pressure of making the right decisions, it’s easy to feel overwhelmed.
Learning universal thumb rules of investing provides you with a straightforward path through the investment process. These established guidelines enable you to make decisions backed by clear objectives, and both risk management criteria and suitable periods
In this article, we’ll explore seven established investment rules accepted by all investors with backing from numerous financial experts throughout the years and research.
Let’s get started!
Table of Contents
What Are Thumb Rules of Investing?
Thumb rules for investment are simple, generalized principles that let investors make speedy financial decisions by considering their goals and risk levels along with their investment methods.
These rules establish fundamental guidelines that allow investors to handle their funds without expert-derived details while offering beginner-level and advanced investor benefits.
Investors implement these rules to structure their financial portfolios and stay clear of mistakes while making personal finance decisions easier to understand.
7 Universal Thumb Rules of Investing
These are a 7 Universal Thumb Rules of Investing you can Check it before investing.
1. The 100 Minus Age Rule – Asset Allocation Made Simple
This straightforward rule helps investors in determining the ratio between stocks (equities) and safer bonds in their investment portfolio. The principle suggests that investors should lower their stock exposure while adding stable assets in the years leading up to their retirement.
How It Works:
Stocks Allocation = 100 – Your Age
The remaining funds should go towards investments that are both safer and more stable, such as bonds.
For example:
- If you’re 30 years old, 70% of your portfolio should be in stocks, while 30% could be allocated to bonds.
- If you’re 50 years old, 50% should be in stocks and 50% in bonds.
Why Does It Work?
This investment principle allows you to pursue growth during your early investment years before concentrating on safety in your retirement period. The strategy combines risk reduction with continued investment growth in the portfolio.
2. The 50:30:20 Rule – Budgeting for Smarter Investing
The 50:30:20 rule represents a common personal financial strategy people use for income distribution among needs, wants, and savings. The financial rule builds a foundational structure that helps you make smart investment decisions while pursuing your future financial objectives.
How It Works:
- 50% of your income goes toward needs (e.g., rent, groceries, utilities).
- 30% of your income goes toward wants (e.g., entertainment, dining out, vacations).
- 20% of your income should be saved or invested (this includes emergency funds, retirement savings, and investment contributions).
Why Does It Work?
Saving 20% of your income enables you to protect your finances while maintaining your current lifestyle. Your financial future will receive attention through this plan, even though your present lifestyle remains unaffected.
3. The Emergency Fund Rule – 3 to 6 Months of Expenses
Always maintain a substantial emergency fund since it represents one of the core elements in personal financial planning. According to the emergency fund rule you need savings equivalent to 3 – 6 months of your expenses for unexpected times such as job loss or medical crises or financial difficulties.
How It Works:
- 3 months of expenses for a single-income household or someone with a stable job.
- 6 months of expenses for a family or someone whose income is less predictable.
Why Does It Work?
A financial emergency fund functions as a safety net that cuts down dependence on loans or credit cards for unforeseen circumstances.
4. The 10-5-3 Rule – Return Expectations Across Asset Classes
Through the 10-5-3 rule, investors can establish realistic return projections between various asset classes. The rule simplifies investing expectations by linking historical returns with annual estimates for asset categories.
How It Works:
- 10% annual returns for equities (stocks).
- 5% annual returns for bonds.
- 3% annual returns for cash equivalents (e.g., savings accounts, money market funds).
Why Does It Work?
The rule helps investors set performance outlooks for portfolio assets. Equities build more wealth but carry higher risk. Bonds and cash equivalents offer stability but lower returns.
5. The Rule of 72 – How Fast Will Your Money Double?
The Rule of 72 enables you to estimate how many years it requires for an investment to double while receiving a specific annual interest rate. The same rule helps both understand compound effects and set reasonable profit goals.
How It Works:
The number of years until your investment doubles can be determined by dividing 72 by your annual returns.
For example:
Computed at 72 ÷ 8 = 9, the time needed for your money to double when you expect an 8% annual return.
Why It Works?
Using this rule allows quick estimation of time-related compounding effects. Through this calculation, investors can monitor the possible expansion of their investment value and then modify their investment approach.
6. The 4% Withdrawal Rule – Retirement Planning Made Easy
The 4% withdrawal rule functions as a standard approach for retirement savings planning. This rule allows people to take annual distributions from retirement savings while ensuring their money stays viable throughout retirement.
How It Works:
Multiply your desired annual retirement income by 25 to determine how much you need to save.
For example, if you want INR 40,000 a year in retirement income, you would need to save at least 40,000 × 25 = INR 1,000,000
Why Does It Work?
According to the 4% rule, you can maintain both financial security and a high withdrawal rate in your retirement years. This rule shows what amount you must save and what amount you can safely spend during retirement years.
7. The SIP Delay Cost Rule – Sooner Is Always Better
Through SIPs, investors can distribute regular payments to mutual funds, which extends the investment risk across multiple periods. Starting investment at an early age leads to enhanced money growth through compounding because time plays a crucial role in accumulation.
How It Works:
- Investing ₹5,000 per month since the age of 25 will build a bigger retirement fund than initiating the same SIP at 35 years.
- When you invest for a shorter duration you will not receive the full compounding advantage that early investors benefit from.
Why Does It Work?
The beginning of your SIP investment establishes more opportunity for compounding which leads to higher potential returns. A delay in starting an SIP produces decreased returns regardless of larger later-life investment amounts.
Common Mistakes to Avoid When Using Thumb Rules of Investing
While Thumb Rules of Investment can simplify investing, misusing them can lead to poor financial decisions if you’re not careful.
1. Don’t follow thumb rules blindly. Always adjust them based on your own financial goals and situation.
2. As you grow older or your priorities change, make sure to update your investment strategy, too.
3. Many thumb rules don’t include inflation, so plan to maintain your buying power over time.
4. Just because an investment performed well in the past doesn’t mean it will give the same results in the future
Also, Check – Best Mutual Funds to Invest in 2025
Conclusion
Thumb rules of investment can simplify the complex world of personal finance and wealth management. The rules offer direct steps that guide investors to enhance their decision-making skills regarding investments, along with risk control, and produce stronger financial stability.
The combination of proven money-managing principles coupled with avoidance of typical errors will lead you toward successful financial outcomes.
Please share your thoughts on this post by leaving a reply in the comments section.
To learn more, contact us via Phone, WhatsApp, Email, or visit our Website.
Alternatively, you can download the Prodigy Pro app to start investing today!
What is the value of an emergency fund?
The emergency fund acts as a buffer against unforeseen occurrences like losing your job or dealing with medical emergencies.
What is the significance of the 4% retirement withdrawal rule?
It tells you how much you need to save by allowing you to withdraw 4% per year without running out of money.
What is the 10-5-3 rule?
It tells you the expected return from an investment, that is, 10% for equities, 5% for bonds, and 3% for cash equivalents.
How does starting early with SIPs benefit me?
Starting early maximizes the power of compounding, leading to potentially higher returns over time.
Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.
Assistant Vice President – Research & Analysis
Akash Gupta heads the Research & Analysis department at BFC CAPITAL, where he combines in-depth market insights with strategic analysis. He holds multiple certifications, including:
- NISM-Series-XIII: Common Derivatives Certification
- NISM-Series-VIII: Equity Derivatives Certification
- NISM-Series-XXI-A: Portfolio Management Services Certification
- IRDAI Certification
With his expertise in equity, derivatives, and portfolio management, Akash plays a key role in providing research-backed strategies and actionable insights to help clients navigate the investment landscape.
