Ep 370 | My 6 Favorite Investment 'Rules'

Thank you for joining me today. It's Brian Gubernick, and welcome to the No Days Off podcast, where we believe that every single day brings a new opportunity to get better. I want to share with our No Days Off Nation my 6 favorite investing slash finance rules. These are really quick basic rules, things that we should know off the top of our head that aid us each and every day as we strive to build wealth, strive to build passive income. Here's some basic rules, and again, we've gone through some of these in, in the past, so some of them might be a review, but we're going to combine them all in an episode today, and there'll be a few new ones in there that that you may or may not know. Let's start with the 4% rule. Probably heard of the 4% rule. What is the 4% rule? It is simply a guideline for retirement planning. And what it suggests is that you can withdraw 4% of your retirement savings each and every year without running out of money. And that should last for about a 30-year period. Period. Actually, likely will last longer, but for sake of the conversation today, it's a 30-year retirement period, period. So this rule, this 4% rule, is just based on this historical data that shows that in most cases, if you have a portfolio that consists of both stocks and bonds— so it's a decent mix of stocks and bonds— it's going to last you 30 years of retirement if you keep your withdrawals from that, that account, to 4% of the portfolio value. And that actually is adjusted annually for inflation. So let's say that you've got $1 million saved up for retirement. What the 4% rule would suggest is that you can withdraw $40,000 in the first year of retirement, and then each subsequent year you would adjust that amount for inflation so that you maintain your purchasing power. So the 4% rule, something we should always be thinking about if you're striving to build wealth and passive income, as you most likely are being that you're listening to the No Days Off podcast. I would be backing into the math, the size of the portfolio that I've got to accumulate so that I can withdraw 4%, and that number equals the number I need to survive and thrive in my retirement years. The next rule, the rule of 72, another one we should have in our pocket at all times. What is the rule of 72? It's a really basic, simple formula used to estimate the number of years it's going to take for an investment to double in value, assuming that investment has a fixed annual rate of return. So the formula is 72, the number 72, divided by that annual interest rate, and that number will equal approximately the number of years it will take for that investment to double. So for example, if you have an investment that earns 8% year over year, then you can estimate that it's going to take 9 years for that investment to double in value. 72 divided by 8. So again, another shortcut that helps us understand certain things within finance. This one in particular is helping us understand compound interest on investments. My next favorite rule in rental properties, it's known as the 1% rule. Another guideline that you can use for quick analysis. According to the 1% rule, If a property's monthly rent is at 1% of the property's purchase price, then that rental property is likely a good one for you. It's potentially profitable. So if I buy a property for $200,000 and I leverage the 1% rule, I should aim to rent that property at $2,000 per month. If I buy a $200,000 property and I can get somewhere close to or even better than $2,000, Odds are that property is going to make a lot of sense. Now, it's not definitive. There's other factors, of course, that come into play. But I can tell you, most every— in most every case, no matter the market I'm in, if I can get 1% of that property's purchase price in rent, it's probably a pretty good one. Now, those are 3 you may have heard before, but I want to go into a few more that that maybe you haven't heard before. This is a really basic one. It's called the 5% rule. Lots of rules here around percents. The 5% rule, this is one that is usually referring to your portfolio, your stock portfolio, or your investment portfolio, that suggests that no single stock, no single investment should make up more than 5% of your total portfolio. Now this would help, as you can imagine, helps you diversify risk and prevent overexposure to any one investment. Okay, now there's one caveat I have for the 5% rule. I do a decent amount of, uh, index fund investing. And index funds, as you may be aware, uh, like for the index fund I favor, which is a Vanguard— VOO is the ticker— which is, uh, tied to the S&P 500. I don't necessarily consider that to be 5% of the port— like, I may have a lot of it, well beyond the 5% of my portfolio, but because that in fact, that fund in fact invests in all of these companies to mirror the S&P 500, I do not consider it to fall under the, the terms of the 5% rule. Now if there was an investment within VOO that, that represented more than 5% of what VOO entailed, I would say that that then is violating the rule. Follow me? If you think about individual stocks and you owned 10 stocks and one of those stocks happened to be Home Depot, and Home Depot, even though you owned, uh, 10 stocks or 20 stocks, actually it should be 20 stocks for sake of this calculation. If Home Depot represented, you know, half of it, that would be a real problem. That would be a real problem in terms of diversification and the risk and the overexposure there. So the 5% rule. The next one I wanna talk around is known as the rule of 1/10. This might be a new one for you. This rule, I think, helps us determine the percentage of our portfolio that should be allocated to stocks. Here's what you do: you take the number 110 and you subtract your age from that number. So if I'm 30 years old, which of course I'm not, but if I'm 30 years old, I take 110 minus 30, that number is 80. That result is the percentage of my portfolio that should be in stocks. So if I'm a 30-year-old, an 80/20 mix, 80% stock and 20% in bonds or something less volatile, that would be a good mix. Now, it goes without saying, as you age, we all know that as you age, you traditionally want to become a bit more conservative in that you are moving from this growth phase to the stability phase. At 45 years old, like I am, this rule would suggest that— let's do some quick math here. What's that? 65. 110 minus 45 is 65. 65% of my portfolio should be in stocks and the remaining 35% should be in bonds or something less volatile. Again, something a bit more fixed or dependable. That actually makes a lot of sense to me, and it's something I will look at. Do I change my investment strategy entirely based on the rule of 110? Not necessarily, but But I will look at my portfolio and say, how heavily weighted am I to the risk that are stocks versus those less volatile investments? For me, it's a 65/35 or somewhere thereabout mix. The very last rule that I wanna talk about here is one that we're all super familiar with, and that's known as Pareto principle. The 80/20 rule. We've heard about the 80/20 rule in work, where 80% of our result is likely to come from 20% of our efforts. We've probably heard about the 80/20 rule in relationships, where 80% of the benefit probably comes from 20% of the activities within a relationship. Or spending habits— 20% of your expenses are likely responsible for 80% of your financial stress. Well, in finance and investing, the 80/20 rule suggests that 80% of your results are going to come from 20% of your investments. So when you look across your rental portfolio, portfolio, know that probably 20-25% of those investments are going to yield 75-80% of the return. That's just how it will play out over time. Now, is it always that way? Not necessarily. But what do I take that to mean? I think what it means is that you don't have to knock it out of the park with every single investment, as nice as that would be. Just know you got to knock it out of the park 20%, 25% of the time and yield a great deal of, of, of result, of 80% of the result then. So again, you're not gonna kill every investment. You just need to win with a good portion of them, and 80% of the success will come from that. So a little bit different an episode. Hopefully this helped you a little bit in terms of these random rules and guidelines that you can keep in your pocket as a baseline, you know, tool, as a foundational tool. Of course, you should always be doing deeper analysis, but these little kind of quick rules to help you assess what you perceive to be financial opportunities, I want to see you leverage the heck out of them as you proceed forward in this wealth building process that you're in. That's all I have for you today, the No Days Off Podcast. Thank you so much for listening, and remember, every single day brings a new opportunity to get better. So let's get after it.