How, when and how much should I invest? 6 Rules!

Investing is a personal journey, unique to each individual. The debate often circles around different strategies, with popular approaches like "Buy the Dip" and "Dollar Cost Averaging" taking the spotlight. But how do you decide which method to follow? The answer lies in understanding your personal circumstances and financial goals.

Buy the Dip vs. Dollar Cost Averaging

"Buy the Dip" involves purchasing more shares when prices are low, aiming to capitalize on temporary downturns in the market. This strategy can be lucrative if timed correctly, but it requires a good deal of market knowledge and emotional resilience. On the other hand, "Dollar Cost Averaging" (DCA) is a more disciplined approach, where you invest a fixed amount regularly, regardless of market conditions (How do I invest correctly?). This method helps mitigate the risk of market volatility and takes the guesswork out of timing your investments.

Both strategies have their merits, and the right choice depends on your financial situation, risk tolerance, and investment goals. Remember, the best strategy is the one that you can stick to consistently. We clearly prefer the savings plan, which is also statistically proven.

Personal Circumstances

Every investor is unique. Whether you're saving for a down payment on a house, planning for your children's education, or looking to build a retirement nest egg, your investment decisions should reflect your specific goals and life stage.

Your investment strategy will likely evolve over time. In your 20s and 30s, you might be in the "Wealth Accumulation" phase, focusing on building wealth. As you approach retirement, you might shift into the "Wealth Decumulation" phase, focusing on preserving your wealth and drawing income from your investments.

How Much Cash Should You Keep on the Sideline?

A crucial part of any financial plan is maintaining an emergency fund. As a general rule of thumb, keep an emergency fund equal to 6-12 months of your income. This fund acts as a financial cushion against unexpected expenses or income disruptions. Beyond this, how much cash you hold depends on your phase of life:

Wealth Decumulation: Prioritize safety and liquidity. Keep a portion of your assets in cash, Treasury bills, or bonds to cover living expenses and unexpected needs without having to sell investments at an inopportune time.

Wealth Accumulation: Focus on investing a larger portion of your income. Since you are still earning, you can afford to invest more aggressively, with less cash sitting idle.

Handy Investment Rules

To help you navigate your investment journey, here are some handy rules to consider:

• The 50-30-20 Rule (our favorite rule):
  • Allocate 50% of your income to essentials like housing and food.
  • Direct 30% towards discretionary spending, such as cars, vacations, and hobbies.
  • Use the remaining 20% for savings and investments.
• 25X Investment Rule:
  • This rule suggests that you should have at least 25 times your annual expenses saved to consider retirement.
  • For instance, if you need CHF 50,000 per year to live comfortably, aim to have CHF 1.25 million saved before retiring.
• 100 - Age Rule (today you can also use 130 to 150):
  • Adjust your investment portfolio based on your age to manage risk.
  • Subtract your age from 100 to determine the percentage of your portfolio to hold in equities.
  • For example, if you are 40 years old, hold 60% in equities and 40% in bonds or other low-risk investments.
  • As mentioned in the headline, these days you can go more to 130 to 150 - your age. We are getting older and older and with an investment horizon of more than ten years and the necessary risk appetite, equities are still the preferred choice
• 1st Week Rule:
  • Save and invest the 20% allocated for savings at the beginning of the month.
  • Delay non-essential purchases by a week to avoid impulsive spending. This pause allows you to consider the true value and necessity of the purchase.
• 40% EMI Rule:
  • The maximum loan you should take on should not exceed 40% of your monthly net income.
  • For example, if you and your spouse earn a combined CHF 10,000 per month, your monthly loan payment should not exceed CHF 4,000.
  • Your car EMI should not exceed 15% of your net monthly income while personal loan EMIs should not cross 10%.
• I have larger amounts to invest, such as CHF 50,000 or CHF 100,000
  • Time in the market is the most important thing, i.e. statistically it is best to invest immediately.
  • From a psychological point of view, however, it is very difficult, and if you belong to the wrong part of the probabilities, you will be nervous and disappointed.
  • That's why we should always proceed in small steps. Whether you do this with CHF 10,000 per month or quarterly doesn't matter. If we experience a bear market or a correction, go faster, otherwise try to invest it over a period of 12 to 16 months.

arvy's takeaway

Investing is a highly personal journey that should align with your unique goals, risk tolerance, and financial circumstances. Whether you choose "Buy the Dip" or "Dollar Cost Averaging," the most important aspect is consistency and a disciplined approach. Maintain an emergency fund, consider your life stage, and use rules like the 40% EMI, 50-30-20, 25X Investment, 100 - Age, and 1st Week Rules to guide your financial decisions.

Starting early and investing regularly can significantly enhance your financial security. Remember, it’s not about predicting market movements but staying the course and allowing time to work in your favor. Happy investing!