Rule of Thumb for Investing

2008 was one of the most challenging years for young investors like us. Our portfolio went down by nearly 35%! That's not fun. Now we are in the process of re-evaluating our strategies and risk taking capacities to set forth on a new direction with renewed vigor. In the process of doing so we were contemplating on what sort of average returns we should shoot for from different types of investments that make up our portfolio.

Call it luck or grace, we received pithy advice in this area from James O Donell's fine book "Shortest Investment Book EverThe Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count." This book is one of the most effective ones on investing that we've come across till date. It's very concise, with a no nonsense yet simple approach to investing that focuses on the essentials alone. There are no complex jargon and philosophies involved. Thankfully it makes us feel that we've not lost it all. There are some well tested timeless principles which still work provided we understand them well :).

Coming back to our question we found a simple answer or suggestion to it in Chapter 6 of Donnell's book. The title of the chapter is "10, 5, 3" and other rules of thumb. At the start of the chapter James tells us to remember the numbers 10, 5, 3. Next we present the gist in his own words:
10, 5, 3. That's all you need to know. Maybe you hoped for more. Sorry. It's as simple as that.

Over long periods of time - without any guarantees, of course, you are likely to get a 10% return on equity-oriented investments, 5% from bonds, and 3% from your cash. Now, those numbers don't account for inflation, taxes, or fees, but you can't control inflation or taxes, and we've already addressed fees (hint: avoid them as much as possible).

Investments returning an average of 10% per year double over about seven years. If you hear someone tell you that they can get you 15 or 20% per year, especially if you are also told "there's no risk," trust me, the person telling you such nonsense is exceptionally misguided.

10, 5, 3 - got it? You don't need charts and graphs and miles of words that equivocate and hem and haw over what you're likely to get. Because no one knows what you will get. We cant' see into the future .......

No one knows what's ahead. So just remember, in spite of depressions, wars, recessions, presidential elections, and assassinations, over long term the numbers are still 10, 5 and 3. They're probably our best guesses for the future.

Hmm...n being conservative in nature and observing the current state of the market we'd rather root for a more achievable 8, 5, 3. That's our rule of thumb for investing this year. Let's see how the year unfolds as we go along and the lessons involved. What are your thoughts on these numbers? We are looking forward towards your feedback.

  About the Author  
James O DonnellJames O' Donnell serves as executive-in residence and associate professor of business and economics at Huntington University, seeking to integrate Christian faith, ethics and values into the realm of business. A thought-provoking writer, his opinions on ethics and finances have appeared in Barron’s, The Wall Street Journal, Fortune, America and many other publications.

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