In a column for MarketWatch, Chuck Jaffe shares 7 financial rules of thumb that may no longer be true. For example, one "rule of thumb" that he highlights is the "Subtract Your Age From 100" rule to determine how much of your total portfolio should be allocated to stocks or stock mutual funds. This has always been a handy little way to determine if you are overweight or underweight stocks. For example, a 20-year-old investor just starting out should have a minimum of 80% in stocks, while a 70-year-old retiree should only have about 30% in stocks. Yet, as Chuck points out, the "Subtract Your Age From 100" might be a bit too conservative:
"In practice, this rule is severely flawed, failing to look at the whole picture. Everything from life expectancy to age at retirement, from amount invested to expected returns and much more impacts a portfolio's ability to last a lifetime. Most advisers seem to think this rule is ultraconservative and would be more comfortable if the number were readjusted to 130 or 140."This rule has completely outlived its usefulness, because people are retiring younger and living longer," says Peg Eddy of Creative Capital Management in San Diego. "People are retiring with 20 years or more to live, and a portfolio that is too conservative just isn't going to work for them. They need more growth, or they will be too vulnerable to inflation over that longer stretch of time."
What are some of the other financial "rules of thumb" that might have outlived their usefulness? For starters, the old adage that U.S. stocks will return 10% per year on average may need to be downshifted to a more conservative number -- like 8% annual returns. Jaffe also weighs in on rules of thumb for everything from when to refinance a mortgage to how much personal savings one should accumulate for emergencies. While rules of thumb can be useful and instructive, they can also induce laziness in financial planning. As one financial guru once noted, "Rules of thumb are for people who want to decide things without thinking about them."
[image: Rule of Thumb by Eva the Weaver on Flickr]