In this world, there are rules for almost everything. Whether you are cooking some food or playing sports, everything has some rules binding it. However, whether you follow these rules or not, that is completely up to you.
While some people think that rules are limitations to someone’s ability others think rules protect them from falling apart.
Similarly, there is the rule of investing which are followed by some investors and some define their own rules.
However, in investing, especially when you are a beginner, following the thumb rules can mitigate a lot of losses and increase your chances of making money from the market.
Here in this article, you will be reading about 20 thumb rules which are beneficial for investors.
1) Bulls and Bears make the money:
While everyone is afraid of the volatility in the markets, but this volatility can earn higher returns.
If the market is going up or down at a very slow pace, then it is highly difficult to amplify the investment. The returns are lower and also the time required is higher.
However, when there is volatility in the market and bull or bear is at its top pace, you can make money out of the market.
The terms bulls and bears describe how the markets are performing.
If the stock market is increasing, it is called a bull market and the economy is growing and is sound.
However, when the stock market sentiments are negative and the market falls with most stock prices decreasing, it is called a bear market.
For instance, the stock market index Nifty 50 at present is roaring and at an all-time high. It has reached almost INR 15900 and this indicates that the market is in a bull phase.
If you have shares of the companies that are going up, then you are bound to make a huge profit in this bull run.
However, most people invest when the market is bullish, i.e. it is rising and only a few people tend to invest when the market is falling.
Moral of the story: You need to invest when the market is volatile, irrespective of whether it is bullish or bearish. The volatile market fetches more return and a stable market.
2) Do not buy everything together:
It is the second thumb rule of investing that you must not buy everything together.
The market is going up and down all the time. So, if you buy every at once, and at the next moment, the market may go upside down and all your investment can go into vain.
Thus, you must analyse each market individually, each asset separately, and then invest.
Also, when you are buying in huge volume, there is no need to buy all at once.
You can buy the same instruments in multiple lots. This gives you the chance to wisely analyze and observe the market.
If anything goes wrong you can close your position and stop trading or investing in that instruments.
However, if you have bought in volume together, and then after some time, the market turns around, it can be sudden death as well.
Moral of the story: You can invest systematically. This would not only help you beat the odds of not investing everything together but also help you with rupee cost averaging.
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3) Rule of 72 of investing:
The rule of 72 is really interesting. Who doesn’t want their money to get doubled up, isn’t it? However, the number of years for doubling the amount is not easy to anticipate.
This rule of 72 however, helps in finding out the number of years your investment would take to double itself. Only with the help of the rate of interest and the number 72, you can find out.
You need to divide 72 by the rate of interest. So, if the rate of interest is 8% and you have invested Rs. 2 lakhs then it would become Rs. 4 lakhs in 9 years.
Moral of the story: You can gauge the time you would need to double your entire investment portfolio (in a fixed return product) with the help of the interest rate.
This would give you a tentative value of the expected pre-tax portfolio (keeping other factors constant such as the associated risks).
4) Rule of 114 of investing:
Now as you know in how many years, your money gets doubled, aren’t you feeling the urge to know the number of years it would take to triple itself? So, you can find that out using the rule of 114.
Similar to the previous rule, here you have to divide 114 by the rate of interest.
So, given the example above, the Rs. 2 lakhs would be Rs. 6 lakhs in (114/8) years = 14.25 years or 14 years and 4 months.
Moral of the story: Again, you can find out the timeframe of when your entire pre-tax investment portfolio can be tripled. However, taxes can be a significant part of your portfolio if not planned properly.
5) Rule of 144 of investing:
Similarly, you can also find out in how many years, your invested amount can be 4 times.
For this, you need to use the rule of 144 which is similar to the previous two rules.
Here you need to divide the number 144 by the rate of interest which is 8% in the example above. So, your Rs. 2 lakhs will be Rs. 8 lakhs in 18 years.
Moral of the story: Similarly, the timelines for the pre-tax investment portfolio can be quadrupled can be calculated.
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6) Rule of 70:
You seem to be happy seeing all your money doubling, tripling but here is the catch.
The amount may increase but the value will not be the same as the amount due to inflation after time passes.
So, it can eventually get halved as well and that can be determined by the rule of 70. Here you have to divide the number 70 by the rate of inflation.
For instance, you have Rs. 20 lakhs and the current rate of inflation is 4%. So, your money will be Rs. 10 lakhs in the next 17.5 years.
Moral of the story: Inflation can really reduce the real value of your investment portfolio. So, if you need to grow your portfolio, you need to factor in inflation and then grow the portfolio to your desired returns to give you an inflation-proof return.
7) Emergency fund rule:
Life is uncertain, anything can happen within even a blink of an eye.
Even if you have a lot of investments, you may not be able to use them if they are not liquid enough.
Moreover, there are penalties for withdrawing money early from your investment instruments. However, the most important factor is, if you are using your investments in the first place to deal with emergencies, you can completely ruin your portfolio.
Obvious investments are for the financial security of the future, but for emergencies, you need to have a contingency fund. This will not only help you in smoothly handling emergencies but also help you safeguard your investments.
Moral of the story: Experts suggest at least 3 months of your monthly expenses be set aside for emergency in an easily accessible fund so that it can be seamlessly accessed even by your family members.
8) Insurance planning rule:
After emergency fund, another important part of investing in insurance planning.
You may be wondering how it is within the rules of investment, then you must understand that when there is some medical crisis, or natural disaster, or anything of that sort, your investments can go for a toss if you rely on them completely.
Especially for medical emergencies, it is important to have Mediclaim policies, health insurance policies, and other insurance policies to safeguard your life, assets as well as investments.
The insurance penetration in India is very low and it is still not bought, but sold. This is where most insurance plans are also ‘mis’ sold.
However, if the story changed, and everyone ’planned’ their insurances and bought them proactively, then the entire concept of mis-selling wouldn’t even exist!
Moral of the story: Insurance is your Plan B, i.e. your family’s safety net. This is why it is crucial to plan it ahead of time so that they are not in a fix in case anything happens to the primary breadwinner of the family!
9) The 4% Withdrawal rule:
For planning a financially secure future, you need to be very particular about the withdrawal rule.
Especially if you are planning for retirement, then you must follow this withdrawal rule of investing.
It says that you must not withdraw more than 4% of your retirement corpus in a year.
For instance, you have accumulated Rs. 2 crores for your retirement. Now, going by the 4% rule, you should only withdraw Rs. 8 lakhs which is Rs. 66666 per month.
Now, there is inflation which needs to be taken care of as well. Suppose, the inflation rate is 5%. So, in order to accommodate inflation, you can also increase the withdrawal by 5% every year.
So, in the first year, you withdraw Rs. 8 lakhs, and then in the second year you can withdraw Rs. 8.4 lakhs and so on so forth.
Moral of the story: The only aspect you need to consider while withdrawing from your Retirement Corpus is to ensure that the corpus grows at a higher rate than the expected rate of inflation in order.
10) 10% retirement rule:
When you are young, you would hardly think about retirement, isn’t it?
However, if you start investing early using the 10% rule of investing for retirement, you can save a huge corpus when you retire.
Suppose you started earning right after completing your graduation at 21 years and your starting salary is say Rs 21,000. Applying the 10% rule, you can save Rs 2000 every month.
This Rs. 2000 may seem a very negligible amount, but using the power of compounding, this small amount can grow like wonders. Here is a snapshot –
|Calculating retirement corpus|
|Investment amount every month||2000|
|The average rate of return||10 per cent|
|Tenure of investment||39|
Total retirement corpus
With just an investment of Rs. 9.36 lakhs, you can build a retirement corpus of Rs. 1.15 crores.
Moral of the story: The power of compounding is the 8th wonder of the world and the advantage of investing early manifests it to a humongous amount.
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11) Rule of diversification:
One of the most important things in investment is risk mitigation and the smartest way to mitigate risk is to diversify your portfolio. Rule of diversification tells you about the correlation between the asset classes.
The correlation between the asset classes you are investing in must be low or negative.
This means, if one asset class is getting affected or going down, the other must go up or remain unaffected.
For instance, when stock prices go down or there is a bear market, the gold price usually goes up. In fact, it is also considered as a hedge investment.
If you compare the two charts above, you can understand that when the stock market was a little sluggish in 2020, the gold prices were at an all-time high.
Moral of the story: Each asset class reacts differently and thus you need to diversify using such assets that your risk of investment goes down.
12) Don’t buy damaged companies, but buy undervalued stocks:
A stock may be damaged which means it is undervalued but the company itself is damaged, which means the stocks are not worth buying. So, it is important to evaluate the company in the first place.
The stock prices can be anything in the market, you need to find out its real/ intrinsic value.
Moral of the story: If the intrinsic value is higher than the prevailing market price of the stock, buy the stock. However, if the company is damaged, the intrinsic value cannot be higher than the market price of the stock.
13) Pay taxes wisely:
There are multiple investment instruments that can help you save your taxes. Invest in ELSS, ULIP, FDs, and many others. When you are investing, you need to check the tax implications for each investment.
For instance, the profit from investment in stocks is taxed as per capital gain tax rules.
Moral of the story: Plan your investments keeping their taxes in mind, so that your real return, i.e. the post-tax income from it is high. Otherwise, your tax pay-out would wipe out a significant part of returns.
14) Make sure you do your homework:
Investing in any asset requires in-depth knowledge and analysis of the asset and the market. You can do your homework by analysing multiple resources both fundamental and technical.
Moral of the story: You can also do your research by visiting the site of Koppr. Here you can get an abundance of information and data which can help you in your financial planning and analysis.
15) Book your profits:
Greed is not good for investors. If your anticipated or targeted price is achieved, then it is wise to sell the assets and book profit.
Moral of the story: The urge of earning more may end up in losing your capital investment as well. Hence, you need to weigh the pros and cons well before investing.
16) Expect corrections, make the most out of it:
Corrections are part and parcel of investment and the financial markets. There cannot be a continuous rise or fall in the prices. If there is an excess rise, it will eventually fall and vice versa.
So, you cannot be worried about corrections. Rather, you must understand how to use them in your favour.
For instance, if there is a correction for ABC stock price, and you hold 500 shares worth Rs. 1000 each.
You bought the shares at Rs. 700 each. So, you are already at a profit of Rs. 150000. However, after reaching Rs. 1000, it started falling. Wait, do not sell all your shares. Analyse whether it is a correction or momentary fluctuation.
If the prices decrease a little, no need to take any action. However, if the prices decrease drastically, then it is better to sell the shares and wait until the correction ends.
Moral of the story: Once the price is at the lowest and again starts climbing up, you can buy the shares back. This is a very tactical investing strategy which if followed properly can be very effective!
17) Keep your ears and eyes open while investing:
The prices go up and down within a blink of an eye. You missed the update, and the price becomes different the next moment. So, it is important to keep a constant check on the market.
Moral of the story: With the help of the Koppr app, you can monitor the market round the clock. You can find all news about the markets on this app.
18) Panicking leads to losses:
When you are investing in the financial markets, you need to stop being worried. If you do panic buying or selling, you would only end up in huge losses.
Moral of the story: Markets will be volatile and that is the basic nature of financial markets. However, if you start panic buying or panic selling often whenever the prices go up and down, then your investment would go for a toss.
19) Flexibility is the key:
If you are rigid about your investments, then it becomes difficult to mitigate risks.
When one asset price is tumbling, or a company is continuously running in losses, you need to sell them.
If you are rigid and do not alter your portfolio, then you will only end up in massive losses. You need to be flexible enough to alter your portfolio whenever necessary.
Moral of the story: Reallocation and rebalancing of portfolio is the key to profitable investment if done at the right time. You need to know your ideal asset allocation and then keep rebalancing your portfolio accordingly.
20) Listen, analyse and invest:
Finally, the most important rule of investment is to listen to everyone, then analysing each point, and then acting according to your final findings.
Suppose, your financial advisor suggested one stock, your friend suggested another, and your colleague another one. You need to evaluate all three of them, also find your promising stocks.
Then analyse them all, check whether they are rightly valued or not.
Moral of the story: After thorough analysis, you need to pick the most suitable one for your portfolio. Listen to everyone, but do what you think is right and what you believe is best for you and your investment portfolio!
Rules of investing are pretty much interesting if you thoroughly read them. Following these rules are up to the investors and traders. You can choose which one to follow and which one not to.
However, these rules are for making your investments better and optimize your profits and reduce the risks.