Page 40 - DIY Investor Magazine | Issue 36

Dec 2022 40
DIY Investor Magazine ·
INVESTING BASICS:
DIY INVESTING RULES OK?
Typically we underestimate how much we need to save. Here are some investment-based rules of thumb to help us plan and track progress – by Christian Leeming
THE SIXTY-SOMETHING RULE
The Sixty Something rule indicates at what age you should have enough money to stop working. Start with your savings rate - the difference between what you earn after tax and what you spend as a percentage; subtract this from 60.
If you earn £30,000 and save £6000 a year, your savings rate is (6,000 ÷ 30,000) x 100 = 20%; take the 20 away from 60 and you’ll have to work for = 40 years.
If you saved another £300 a year, the rate is 21%, so you can stop work a year earlier. This rule breaks down when the savings get unrealistically high, and ignores windfalls or unexpected costs.
INITTOWINIT
Somebody will win the lottery but even if it’s not ‘you’, you may will get a bonus or an inheritance; if so, consider using 1% to indulge yourself now, and put the rest somewhere you won’t be tempted to dip into for six months.
Then, did you miss the money - or maybe you still want that new car? Either way, you gave yourself time to research a purchase and won’t experience buyer’s remorse.
THE 72 RULE TO DOUBLE YOUR MONEY
Divide 72 by the interest rate or rate of return you’re earning, and that’s the number of years it will take for your money to double in value.
If your rate of return is 6%, your money will double in 12 years (72÷6=12).
THREE-MONTH EMERGENCY CASH RULE
Having three months of emergency cash means being able
to carry on meeting your expenditure if your main source of income disappears – a benchmark used by financial planners, this allows you to carry on and not have to sell investments in haste or dip into savings.
THE 10, 5, 3 RULE
This is the expected long-term return from equities 10%, bonds 5% and cash 3%; combine with the rule of 72 to see how long it takes for each asset class to double in value.
Equities–72÷10=7years Bonds–72÷5=14years Cash–72÷3=24years
It shows why cash may not get you to your target in time.
Equities are fastest so should reach higher targets but at greater risk. All would be reduced by inflation.
THE 100 MINUS YOUR AGE RULE
100 minus your age is another asset allocation rule— it gives you the percentage of equities you should hold in your portfolio, with the balance going into low-risk bonds.
EG, at age 20 you need 80% equity 20% bonds; at age 50, equity drops to 50% and bonds 50%. The idea is that as you get older you move out of equities and into lower-risk bonds. Advisers call this derisking or life-styling.
In later life having a high proportion of equities creates a hazard to income if the short-term value of the portfolio suddenly moves up or down in value as the fund can’t recover — being forced to sell equities when markets are down is not something you want todo.