How to make split-second investment decisions

I’ve worked in finance for over 6 years and I’ve had the privilege of working in private equity and at Goldman Sachs.

In total, I’ve helped manage over $6.8 billion worth of investments.

Rules of thumb were crucial to making split-second decisions.

Here are 10 investing rules of thumb I rely on...

1. 4% rule

You can withdraw 4% of your portfolio every year and never run out of money.

There are 2 ways to find this number:

1. Multiply your desired annual withdrawal by 25

2. Multiply your total portfolio by 4%

If you have a $1.5 million portfolio, you can withdraw ~$60,000 a year.

Some say this rule should be 3%.

Others say it should be 6%.

I like to meet everyone in the middle at 4%.

2. Rule of 72

This rule tells you how long it’ll take for your investments to double in value.

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.

But there’s also another way to use this rule of thumb…

2.5: Rule of 72 cont.

It can also tell you your required rate of return.

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.

3. Rule of 114

Similar to the rule of 72, this rule shows you how many years it takes to 3x your money.

Calculate by dividing 114 by your expected rate of return.

114/8% return = 14 years to 3x your investment.

4. Rule of 144

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.

5. How much to invest in bonds

Tradition says invest your age as a % of bonds.

So a 20 year old will have bonds make up 20% of their portfolio.

I think that’s too conservative, even for the risk-averse.

So if you want bonds in your portfolio, here's how to determine the amount:

120 - [your age] = how much you invest in stocks — invest the difference in bonds.

Here's an example with a 20-year-old:

120 - 20 = 100% in stocks and 0% in bonds

Let's see it for a 40-year-old:

120 - 40 = 80% stocks and 20% bonds

6. 5/25 Rule

When to rebalance your assets:

If large asset classes increase or decrease by an absolute 5% it’s time to rebalance.

So if a stock makes up 25% of your portfolio and increases to 30% or falls to 20% of your portfolio you need to sell or buy more shares.

If small asset classes increase or decrease by 25% of their size it’s time to rebalance.

So if a stock makes up 5% of your portfolio and rises to 6.25% you need to sell some shares.

And if it falls to 3.75% you need to buy more shares.

7. 7 year rule

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.

Stocks are volatile.

When you choose not to invest money you need in the short-term, it ensures it maintains its value.

8. Stock market average return

On average the stock market has returned ~10% a year over its lifetime.

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.

9. The 5% rule

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.

10. 10/5/3 rule

The long term average annual rate of return for stocks, bonds, and other cash equivalents.

• Stocks: 10%

• Bonds: 5%

• CDs, HYSAs, etc.: 3%

This may not always be accurate in the short term.

But these have been the historical average return over the long term.

How many of these rules of thumb were you familiar with? Which one's do you use?

Reply to this email and let me know!

Wolf