Somehow this topic has come up a few times in the last week, so obviously it makes sense to share it.
I was casually speaking to a few friends and we started discussing about what to invest where.
Should I invest or Should I not?
Equities or Debts?
Derivatives? Futures or options?
Stock markets or Mutual funds?
ULIPs or SIPs?
Bank Deposits or Government Bonds?
Gold or Gold ETF?
or just Cash in the Mattress?
I have heard of this method a few times from my teacher and other seniors and its called the "Rule of 1/3rd" and its a deceptively simple method.
I'm not exactly an expert on personal finance and I don't hold any fancy degrees... but following this simple thumbrule has been the foundation of every financial decision I have taken so far... and I'm sure I've not done that bad either...
Following this method has done a lot of good to me in the past and I suggest it to people at every possible opportunity. So here we go:
By investing 1/3rd in zero risk investments, you have safeguarded your interests. Even if everything goes wrong, this 1/3rd will ensure that you don't go broke.
The second 1/3rd which goes in low risk investments will put you in second gear where you can give some additional speed to your portfolio. It allows you to go faster and higher.
The final 1/3rd which you are investing in high risks is what puts you in top gear, allows you to go fastest. But we all know when we go too fast... we risk losing control... As Uncle Ben once said - "With great returns comes great risk" (or something similar)
Just because you are investing 1/3rd in high risk portfolio doesn't mean you invest mindlessly. Even investments in high risk securities should be done after all the possible research and evaluation.
Most of the problems happen when people fail to follow this thumbrule. Some don't make any investments at all. Another bunch goes and invests everything in high risk investments and probably end up losing a lot.
Lets take what we can from this sharing and move towards being better and more informed investors.
I was casually speaking to a few friends and we started discussing about what to invest where.
Should I invest or Should I not?
Equities or Debts?
Derivatives? Futures or options?
Stock markets or Mutual funds?
ULIPs or SIPs?
Bank Deposits or Government Bonds?
Gold or Gold ETF?
or just Cash in the Mattress?
I have heard of this method a few times from my teacher and other seniors and its called the "Rule of 1/3rd" and its a deceptively simple method.
I'm not exactly an expert on personal finance and I don't hold any fancy degrees... but following this simple thumbrule has been the foundation of every financial decision I have taken so far... and I'm sure I've not done that bad either...
Following this method has done a lot of good to me in the past and I suggest it to people at every possible opportunity. So here we go:
- Out of your total income, set aside 1/3rd for investment. One third of your monthly income should be invested every month without fail.
- This 1/3rd which you invest should again be divided into 3 parts.
- 1st 1/3rd should be invested into zero risk investments - Government Bonds, Bank deposits, Postal Savings, Provident Funds etc.
- 2nd 1/3rd should be invested in low risk investments - Mutual funds, Corporate Bonds, ULIPs, SIPs, etc.
- The remaining 1/3rd should be invested in high risk investments which yield higher returns.
By investing 1/3rd in zero risk investments, you have safeguarded your interests. Even if everything goes wrong, this 1/3rd will ensure that you don't go broke.
The second 1/3rd which goes in low risk investments will put you in second gear where you can give some additional speed to your portfolio. It allows you to go faster and higher.
The final 1/3rd which you are investing in high risks is what puts you in top gear, allows you to go fastest. But we all know when we go too fast... we risk losing control... As Uncle Ben once said - "With great returns comes great risk" (or something similar)
Just because you are investing 1/3rd in high risk portfolio doesn't mean you invest mindlessly. Even investments in high risk securities should be done after all the possible research and evaluation.
Most of the problems happen when people fail to follow this thumbrule. Some don't make any investments at all. Another bunch goes and invests everything in high risk investments and probably end up losing a lot.
Lets take what we can from this sharing and move towards being better and more informed investors.
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