First day cover ·
The 10-5-3 Investing Rule: A Useful Estimate With Important Limits
The 10-5-3 rule can help estimate a portfolio’s average return, but market swings, costs and retirement timing can change the outcome.
The 10-5-3 rule gives investors a quick way to estimate long-term returns: assume stocks average 10% a year, bonds 5% and cash 3%. Those figures can make a portfolio easier to picture, but they can also make uncertain returns seem more dependable than they are. The rule works best as a rough illustration, not as the foundation of a financial plan.
Where the estimates come from
The rule’s percentages are based on long-term historical averages. Wells Fargo Investment Institute data cited in the source puts annualized returns for large-cap stocks at 10.5% from 1926 through 2025. Long-term Treasury bonds returned 5%, while short-term Treasury bills returned 3.3%.
Those past results help explain the rule, but they don’t tell investors what their own portfolios will earn. Returns can vary widely from year to year, and future results may differ from historical averages. Mike McCracken, founder of Wealth Guide Financial, describes the gap between a market’s historical average and an investor’s actual experience as significant.
That makes the 10-5-3 rule a reasonable starting point for someone new to investing, as McCracken suggests. Investors making detailed plans, especially plans tied to retirement, need to account for a wider range of possible outcomes.
Estimate a portfolio’s average return
The calculation applies each assumed return to the share of the portfolio held in that asset class, then adds the results. Christopher Walsh, a regional marketing director and financial advisor at Capital Choice Financial Group, uses this approach.
Consider a hypothetical $100,000 portfolio with 60% in stocks, 30% in bonds and 10% in cash. Applying the rule’s assumptions:
- The $60,000 stock allocation at 10% would produce a hypothetical $6,000 return.
- The $30,000 bond allocation at 5% would produce $1,500.
- The $10,000 cash allocation at 3% would produce $300.
Together, that’s $7,800, or a hypothetical average annual return of 7.8%. The result is an estimate based on the assumptions, not a forecast of what the portfolio will earn in any particular year.
Walsh pairs the calculation with the Rule of 72, a rough way to estimate how long an investment might take to double. Divide 72 by the assumed annual return: at 7.8%, the estimate is a doubling in about nine years. That illustration assumes consistent returns and no deposits or withdrawals—conditions that real investors shouldn’t expect to hold every year.
What the estimates suggest for 2026
Historical averages can be a poor fit for a shorter planning period. Vanguard’s July 2026 capital markets forecast, cited in the source, projects U.S. stock returns of 4.2% to 6.2% over the coming decade. Its forecast for U.S. bonds is 4.3% to 5.3%, and for U.S. cash, 3% to 4%. The stock range is well below the 10% assumption in the 10-5-3 rule.
Walsh prefers a 7% to 9% average annual return assumption, depending on an investor’s time horizon and comfort with risk. He sees the 10-5-3 estimates as more useful for younger investors with decades to invest, since the historical averages are generally drawn from periods of 30 years or longer. A long time horizon may improve the chance of experiencing something closer to a long-term average, but it can’t ensure that outcome.
For someone approaching retirement, McCracken puts more weight on what happens in weak markets. He favors cautious estimates and testing whether a retirement plan can withstand both strong and poor market conditions. That’s a more useful question than whether a portfolio can match a single average.
Why an average can hide risk
A portfolio doesn’t earn its average return in a smooth line. In 2022, rising interest rates coincided with declines in both stocks and bonds. The S&P 500 fell 18%, its fourth-worst year since it began in 1957, while the Bloomberg Aggregate Bond Index dropped 13%. A simple stock-and-bond mix didn’t protect investors from losses that year.
The estimate also leaves out diversification, fees, taxes, deposits and withdrawals. These can all affect the returns a household actually experiences. A portfolio concentrated in a handful of companies may behave very differently from broad market averages. Walsh points to exchange-traded funds (ETFs) as one relatively inexpensive way to spread holdings across companies and sectors, though diversification can’t prevent losses.
Retirees also face sequence of returns risk: a sharp market decline early in retirement can make savings harder to sustain, particularly if withdrawals continue while investments have fallen. As McCracken puts it, “You don’t get to spend your average rate of return, you can only spend the actual returns you receive.”
Use the rule to frame a question
The 10-5-3 rule can help compare hypothetical asset mixes or give a new investor a first estimate. For major goals, though, the useful question is what return the plan needs—and what risks are involved in trying to earn it. McCracken’s example is straightforward: if a retirement plan can work at a 5% return, taking on extra risk to pursue 10% may not be necessary.
Time horizon, financial goals and tolerance for losses all matter when deciding how to invest. Treat the rule as a starting estimate, then consider how fees, taxes, cash flows and poor market periods could change the result. The aim is to build a plan around a return your goals require, rather than assume a long-term average will arrive on schedule.
