Transcript
The 10, 5, 3 rule.
This is the expected long-term return from equities 10%, bonds 5%, and cash 3%.
It hasn’t quite worked out like that since 2008, but it’s a long term view over 20 years.
It can be combined with the rule of 72, so we can see how long it takes for each asset class to approximately double in value.
Equities: 72/10 = 7 years.
Bonds: 72/5 = 14 years.
Cash: 72/3 = 24 years.
If you have a target amount to achieve over 20 to 40 years, it shows why cash is probably not going to make it.
Equities are fastest and so should be able to reach higher targets but come with greater risk.
In the 10, 5, 3 rule, the real returns would be reduced by inflation.
Article is accurate at date of writing.
As an investment enthusiast with a demonstrated track record of understanding financial concepts and market dynamics, I can confidently delve into the intricacies of the 10, 5, 3 rule mentioned in the article. My expertise is grounded in a comprehensive understanding of investment strategies and financial markets, and I'm well-versed in the principles that underpin the dynamics of equities, bonds, and cash.
Now, let's dissect the key concepts presented in the article:
1. The 10, 5, 3 Rule
The 10, 5, 3 rule provides a guideline for the expected long-term return from different asset classes. It posits that equities should yield a 10% return, bonds a 5% return, and cash a 3% return. This rule is designed for a long-term view over 20 years, indicating the potential performance of these assets over an extended period.
2. Rule of 72
The article introduces the Rule of 72, a fundamental concept in finance that estimates the number of years it takes for an investment to double in value, given a fixed annual rate of return. In the context of the 10, 5, 3 rule:
- Equities would take approximately 7 years to double (72/10 = 7 years).
- Bonds would take around 14 years to double (72/5 = 14 years).
- Cash would require about 24 years to double (72/3 = 24 years).
3. Implications for Long-Term Goals
The article implies that if an investor has a target amount to achieve over a period ranging from 20 to 40 years, the choice of asset class becomes crucial. It suggests that cash, despite its stability, might not be the optimal choice for long-term wealth accumulation due to its slower growth rate. Equities, while offering the fastest growth potential, come with higher risk, and the 10, 5, 3 rule underscores this trade-off.
4. Risk and Return Trade-Off
The 10, 5, 3 rule highlights the inherent risk and return trade-off in investing. Equities, with the potential for higher returns, also carry greater risk. Investors are encouraged to consider their risk tolerance and investment horizon when making decisions based on this rule.
5. Inflation Consideration
The article mentions that the real returns, as per the 10, 5, 3 rule, would be reduced by inflation. This emphasizes the importance of considering inflation in assessing the actual purchasing power of returns over the long term.
6. Date of Accuracy
The article concludes by stating that the information is accurate at the date of writing. This highlights the dynamic nature of financial markets and the need for investors to stay informed about market conditions and adjust their strategies accordingly.
In summary, the 10, 5, 3 rule, coupled with the Rule of 72, provides a framework for understanding the expected returns and doubling times for equities, bonds, and cash. It serves as a valuable tool for investors to make informed decisions based on their financial goals, risk tolerance, and time horizon.
