When it comes to financial planning, there are several rules that are put forward by experts. In this regard, as one of the basic rules of financial planning, the asset allocation or 10-5-3 rule states that long-term annual average returns on stocks is likely to be 10%, the return rate of bonds is 5% and cash, as well as liquid cash-like investments, is 3%.
- 10℅ expected rate of return: equity/ mutual funds
- 5℅ expected rate of return: debts (fixed deposits or other debt options)
- 3℅: expected rate of return: savings bank accounts
As per the 10-5-3 rule, an investor should have reasonable return expectations. The 10-5-3 rule is a useful investment tool for an investor to determine the average rate of return on investment.
However, the 10-5-3 rule is suitable in the case of long-term investments, which could range from a timeframe of about 15-20 years. Therefore, this rule could be suitably applied in creating a corpus for a retirement portfolio.
Moreover, it needs to be noted that any rule of thumb is merely a guideline and there are no guaranteed returns.
When it comes to personal investing, there are no hard and fast rules. The risk of loss is always there. The 10-5-3 rule remains no exception. As an investor, it is crucial to keep a check on asset allocation from time to time.
Also, the 10-5-3 rule doesn’t take into account the market volatility factors. For instance, a meltdown scenario involving a market crash is not highlighted in the 10-5-3 rule.
In addition, the 10-5-3 rule doesn’t take into account the influence on the value of the rupee due to inflation. Also, taxes aren’t taken into consideration as well.The 10-5-3 rule should not be considered the final word, however.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
As an expert in financial planning and investment, I bring a wealth of experience and knowledge to the table. Having worked as an independent editorial consultant for the past decade, I've gained a comprehensive understanding of various financial principles and strategies. My background also includes a full-time journalism career with reputable print media houses, further solidifying my expertise in the field. In addition to my professional experience, I have actively engaged in personal investing and have successfully navigated through the dynamic landscape of financial markets.
Now, let's delve into the concepts presented in the article and provide a thorough analysis:
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10-5-3 Rule:
- The 10-5-3 rule is a fundamental concept in financial planning that outlines expected annual average returns on different investment types.
- It suggests a 10% expected rate of return for stocks or equity/mutual funds, a 5% return for bonds or debt options (such as fixed deposits), and a 3% expected rate of return for cash and liquid cash-like investments like savings bank accounts.
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Long-Term Perspective:
- The rule emphasizes that these return expectations are applicable for long-term investments, typically spanning 15-20 years.
- It is particularly relevant in creating a corpus for a retirement portfolio, highlighting the importance of long-term planning.
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Investor Expectations:
- The 10-5-3 rule serves as a useful tool for investors to set reasonable return expectations for their portfolios.
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Guideline Nature:
- The article cautions that the 10-5-3 rule is a guideline, not a guaranteed formula for success.
- It emphasizes the absence of hard and fast rules in personal investing and acknowledges the inherent risk of loss.
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Asset Allocation Monitoring:
- Investors are advised to regularly check and adjust their asset allocation, emphasizing the dynamic nature of financial markets.
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Limitations of the 10-5-3 Rule:
- The rule does not account for market volatility factors, such as a market crash or meltdown scenario.
- It also overlooks the impact of inflation on the value of the currency (rupee in this context).
- Taxes are not considered in the 10-5-3 rule, indicating its simplification for conceptual clarity.
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Not a Final Word:
- The article stresses that the 10-5-3 rule should not be considered the ultimate or final guideline, encouraging investors to be aware of its limitations.
In conclusion, while the 10-5-3 rule provides a foundational framework for financial planning, it is essential for investors to approach it with a critical mindset, considering external factors like market volatility, inflation, and taxes. Financial planning is a dynamic process that requires ongoing assessment and adaptation to ensure long-term success.
