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Gav Blaxberg, CEO and founder of Wolf Financial, shared his 10 rules of thumb for investing.
Blaxberg is a former Goldman Sachs Group Inc GS alumni, where he helped manage $5.5 billion in assets as a market analyst. Since then, Blaxberg has become an influencer in financial social media, helping thousands of followers manage their portfolios and build wealth.
Rule 1: The 4% Rule
A personal finance classic, the 4% rule aims to find a fixed rate at which a retiree can withdraw money from their investment account without affecting their bottom line. It can also help aspiring retirees calculate how much they would need to save up in order to retire.
“You can withdraw 4% of your portfolio every year and never run out of money. If you have a $1.5 million portfolio, you can withdraw ~$60,000 a year. Some say it should be 3%. Others say it should be 6%. I like to meet everyone in the middle at 4%,” said Blaxberg.
The recommended rate actually varies from year to year, according to present valuations.
Related: Retiring In 2022: New Research Finds The Ideal Withdrawal Rate, And It’s Not 4%
Rules 2 to 4: The Rules of 72, 114 and 144
This set of rules are used to calculate how long it’ll take for someone’s investments to double, triple or quadruple in value.
For doubling, we use the “rule of 72.”
“Calculate it by dividing your expected rate of return from 72. Here’s what it looks like with an 8% return: 72/8 = 9 years to double,” said Blaxberg.
The rule can also tell us our “required” rate of return, he says.
“If you want to 2x your money in 10 years, the rule of 72 will tell you what % return you need. 72/10 years = 7.2% return required. In other words, you need a 7.2% return to 2x your money in 10 years.”
To calculate how many years it takes to triple our money, we use the “rule of 114.”
“Calculate by dividing 114 by your expected rate of return. 114/8% return = 14 years to 3x your investment.”
And to quadrupling, the “rule of 144”
This one “shows how many years it’ll take to 4x your money.”
“Calculate by dividing 144 by your expected rate of return. 144/8% return = 18 years to 4x your investment,” said Blaxberg.
Rule 5: Investing In Bonds
Portfolio managers advise investors to hold a diversified portfolio of both stocks and bonds, in order to hedge against downturns in the equity market as, many times, stocks and bonds tend to balance each other’s losses.
Related: What Is A Bond? and How To Buy Bonds?
“Tradition says invest your age as a % of bonds,” says Blaxberg. That would mean that a 20-year-old will have bonds make up 20% of their portfolio.”
However, he believes “that’s too conservative, even for the risk averse.”
The correct way to handle bonds in a portfolio, he said, is to invest 120 minus your age in stocks and the rest in bonds.
Rule 6: The 5/25 Rule
Many investors wonder when is the right time to rebalance their asset sheet.
Blaxberg’s rule of thumb said: 5% for large assets, 25% for small assets.
“If large asset classes increase or decrease by an absolute 5% it’s time to rebalance. If small asset classes increase or decrease by 25% of their size it’s time to rebalance.”
Rule 7: The 7 Year Rule
“Stocks are volatile, not investing short-term money ensures it doesn’t lose value,” says Blaxberg.
In short, this rule helps investors understand that equity investing decreases its risk with longer time frames.
“If you want to be conservative, don’t invest money you expect to need in the next 7 years. If you want to be aggressive, don’t invest money you’ll need in the next 5 years,” he says.
Rule 8: The Average Return Of The Stock Market
There are many myths about the average return of the S&P 500 and other market gauges.
“On average, the stock market has returned ~10% a year over its lifetime,” says Blaxberg.
Between 1928 through Dec. 31, 2021, the 10-year return of the S&P 500 has been 11.82%.
However, that’s not true for every 10-year period. The so-called “lost decade” saw a cumulative loss for the S&P 500 of 9.1% from December 31, 1999 to December 31, 2009.
“If you want to be aggressive in your calculations, assume 10%. If you want to be conservative, assume 8%. Then calculate the impact of inflation,” says Blaxberg.
Rule 9: The 5% Rule
This rule is fairly straightforward and it aims to advise on where to draw the line in single-stock holdings.
“No more than 5% of your portfolio should be in a single stock. Tying your net worth to an individual company is risky. Limiting each company to 5% of your portfolio hedges against that risk;” says Blaxberg.
Rule 10: The 10/5/3 Rule
This rule attempts to establish the long-term average annual rate of return for stocks, bonds, and other cash equivalents.
“Stocks: 10%, Bonds: 5%, CDs, HYSAs, etc: 3%,” says Blaxberg.
He advises that this may not always be accurate in the short term, “but these have been the historical average return over the long term.”
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Image and article originally from www.benzinga.com. Read the original article here.