Looking for a few straightforward rules to help you navigate the world of investing? Whether you’re just getting started or have been investing for a while, these seven tried-and-tested rules of thumb can help you cut through the noise and invest with more confidence.
Remember, these shortcuts aren’t for everyone. Always do your own research and make sure every decision aligns with your personal goals, timeframe and how comfortable you feel about risk.
1. The 50/30/20 Rule – budgeting made simple
If you’ve ever wondered how much of your income you should be spending (and saving), this rule offers a healthy framework to try and live, work and save by.
- 50% of your take-home pay goes to your essentials – such as your mortgage/rent, utilities, groceries and insurance.
- 30% goes on nice-to-haves – such as eating out, holidays, subscriptions and hobbies.
- 20% goes towards savings and debt repayment – such as your emergency fund, investments, or overpaying loans.
Our take? If your ‘essentials’ (your cost of living) eats up more than 50%, see if you can cut down on your ‘nice-to-haves’ before eating into your ‘savings and debt repayment’ pot (don’t get rid of everything that’s fun – it’s important to live life too!).
2. The emergency fund rule – your financial security blanket
The aim is simple – to save three to six months’ worth of essential expenses in a cash-accessible emergency fund. Why?
Life isn’t linear. It throws curveballs – such as redundancy, your boiler breaking down or a sporting injury that you might need to pay physio for out of your own pocket. An emergency fund helps you to avoid dipping into long-term investments or racking up debt.
Our take? An emergency fund allows you to retain a little more financial control. Even more so if you’re self-employed or have irregular income, when you should try to and save closer to 9–12 months’ worth.
3. The 60/40 rule – the tried and tested portfolio split
For decades, fund managers and investors alike have turned to the 60/40 portfolio as a starting point.
- 60% in equities – like individual shares or equity funds (for growth) and
- 40% in bonds (fixed income) for stability and income.
The idea is that when markets are volatile, bonds go some way to help cushion the blow. But when share prices go up, you have enough in your portfolio to benefit from growth.
But take note… the classic 60/40 split has not worked as well in recent years. Bonds and shares have often headed in the same direction in the same economic conditions (something they’re not meant to do). Many experts believe that it’s time to revisit this rule of thumb and look to diversifying even further by investing in property, alternatives and gold.
Our take? Think of the 60/40 portfolio split as a starter for ten. It will help you better understand how you feel about risk and you can then adjust accordingly. It’s definitely not a one-size-fits-all solution.
4. The rule of 100 – age-based risk guide
Here’s an alternative rule of thumb to the 60/40 portfolio split.
This rule helps you shape your portfolio’s risk based on your age and stage in life. The idea is that younger investors have more time to ride out market dips, while older investors may prioritise preserving wealth over growing it. As you age, your portfolio gradually shifts toward lower risk.
The formula is simple:
Take 100, subtract your age. This equals the % of your portfolio you should hold in equities. The rest goes into lower-risk investments like bonds, cash, or more stable assets.
So, a 30-year-old might hold 70% equities and 30% bonds/cash.
While a 60-year-old might be a bit more conservative with 40% in equities and 60% in more defensive assets.
Our take? Thanks to longer life expectancy and rising costs in retirement, some experts now use 110 or even 120 minus your age as the starting point, especially if you’re more focussed on growth. This is a guide, not something that’s set in stone – so adjust it to suit your appetite for risk.
5. The rule of 72 – how long it might take for your money to double
Want to know how long it might take for your investments to double in value? Divide 72 by the interest rate (or average annual return) to get an estimate in years. Here’s a simple example.
- At a 6% average annual return – 72 ÷ 6 = 12 years
- At an 8% average annual return – 72 ÷ 8 = 9 years
Our take? No returns are guaranteed. But it’s helpful to understand why investing should be for the long term and to stay motivated.
6. The 4% rule – a retirement withdrawal guide
The 4% rule suggests that in retirement, you can withdraw 4% of your investment portfolio per year, adjusted for inflation, with a reasonably low risk of running out of money over 30 years.
So, if you’ve saved £500,000, that means you could withdraw £20,000 in year one, adjusting this withdrawal for inflation going forward.
Our take? It’s a good way to help you understand what income you can afford when you retire. We have other useful retirement calculators that can help with that too.
7. The rule of 20 – valuing the stock market
I’ve saved this one until last as it’s a bit more technical. The rule of 20 says that a stock market is fairly valued when the P/E ratio plus the inflation rate equals 20.
So, if Company X’s P/E is 17 and inflation is 3%, the rule of 20 would find that this company is fairly valued (17+3=20)
If the sum is over 20, some investors interpret the valuation to be potentially overvalued. And if it’s under 20, it could be potentially undervalued.
Our take? Don’t rely solely on the Rule of 20 – always dig deeper. Do your own research, and make sure every decision lines up with your goals, timeframe and comfot with risk.