What Is the 10-5-3 Rule in Investing?

The 10-5-3 rule gives investors a simple benchmark for expected long-term returns across three major asset classes: roughly 10% per year from stocks, 5% from bonds, and 3% from savings or cash equivalents. It is not a prediction. It is a historical average, and like all averages, it hides a lot of variation.

But used correctly, it is one of the most useful mental models in personal finance.

Where Each Number Comes From

The 10% Stock Return

The U.S. stock market, as measured by the S&P 500, has returned approximately 10.5% per year on average from 1926 through 2023 (source: Morningstar, measured in nominal terms). That number includes dividends reinvested. It also includes the Great Depression, World War II, the dot-com crash, the 2008 financial crisis, and the 2022 bear market.

Ten percent is a genuine long-run average, not a cherry-picked figure. But the variance around that average is enormous. In individual years, the S&P 500 has returned as much as +52.6% (1954) and as little as -43.3% (1931). You rarely actually get 10% in any given year. You get a wild range of outcomes that average to 10% over decades.

International stocks have historically returned closer to 7-9% annually. The 10% figure is specific to the U.S. market, and there is genuine debate about whether U.S. stocks will continue to outperform global markets at historical rates. Vanguard's long-term projections as of 2025 put U.S. stock returns at roughly 7-9% annually over the next decade, modestly below the historical average.

The 5% Bond Return

Long-term U.S. Treasury bonds have historically returned approximately 5-6% annually. Investment-grade corporate bonds have done slightly better, around 5.5-6.5%. The 5% figure in the rule is reasonable, but it is not uniform across bond types or time periods.

From 2010 to 2021, a decade of near-zero interest rates compressed bond yields dramatically. A 10-year Treasury bond yielded less than 1% in 2020. Investors who bought bonds in that era locked in very low returns. Then in 2022, something unusual happened: the Federal Reserve raised interest rates at the fastest pace since the 1980s, and both stocks and bonds fell simultaneously. The traditional diversification benefit of holding bonds failed exactly when investors needed it most. The Bloomberg U.S. Aggregate Bond Index lost 13% in 2022, its worst year since the index began.

As of early 2025, bond yields have reset to more normal levels. The 10-year Treasury yields roughly 4.5%, which makes the 5% long-run estimate more plausible again than it was a few years ago.

The 3% Savings Return

The savings number has had the most volatile history of the three. In 2021, high-yield savings accounts paid roughly 0.5%. By late 2023, after the Fed's rate hikes, many paid 5%+. The 3% figure in the rule is now a rough middle ground between those extremes, not a reliable baseline.

For long-term planning purposes, treating savings accounts as a place to park emergency funds (3-6 months of expenses) rather than a wealth-building vehicle is the correct mental model. The 3% benchmark is useful mainly to show how much less cash earns compared to stocks over time.

Nominal Returns vs. Real Returns

The 10-5-3 rule uses nominal returns, meaning returns before adjusting for inflation. This matters enormously when you are planning decades ahead.

With historical inflation averaging around 3% per year, the real (inflation-adjusted) version of the rule looks like this:

That zero next to savings is the key insight. Money sitting in a savings account earning 3% when inflation is also running at 3% is not growing in purchasing power at all. You are running to stand still.

The 7% real return on stocks is the number financial planners use most often for long-term projections. It is what drives the familiar "money doubles every 10 years" rule of thumb (using the Rule of 72: 72 / 7 = approximately 10 years to double).

Using the Rule for Retirement Planning

The 10-5-3 rule becomes genuinely useful when you apply it to specific numbers. Here is what a $500,000 portfolio produces under different assumptions over 20 years:

The gap between 10% (all stocks) and 5% (all bonds) over 20 years is more than $2 million on a $500,000 starting portfolio. That is the price of choosing a more conservative allocation. For retirees who need capital preservation and income, that tradeoff is often worth it. For a 35-year-old with three decades ahead, holding mostly bonds is giving up an enormous amount of compounding.

When the Rule Breaks Down

The rule assumes you are investing across long time horizons, 20 years or more. It breaks down in shorter periods. Dramatically.

The lost decade from 2000 to 2010 is the most cited example. The S&P 500 returned essentially nothing over that entire ten-year span, ending the decade lower than where it started (on a price basis). An investor who retired at the start of 2000 with 100% stocks would have had a very difficult time.

The 1970s are another example. High inflation and sluggish economic growth produced negative real returns on stocks for years. The nominal numbers looked acceptable, but inflation was eating 7-10% per year, leaving investors worse off in real terms.

The rule also assumes you are invested in a diversified index, not individual stocks. Individual stocks fail, go bankrupt, and get delisted. The 10% average is produced by a small number of big winners carried by a broad index. Anyone trying to replicate a 10% return by picking individual stocks faces far more uncertainty.

There is also a geographic caveat. Japan's Nikkei 225 index peaked in 1989 and took until 2024, more than 35 years, to sustainably surpass that level in nominal terms. An investor in the Japanese stock market following the "10% rule" for decades would have been badly wrong. The 10% figure is specifically American, and past performance of the U.S. market is no guarantee of future results.

Alternatives and More Sophisticated Benchmarks

Vanguard publishes 10-year forward return projections annually. As of their 2025 report, they project:

• U.S. stocks: 7-9% annually over the next decade
• International developed-market stocks: 8-10% (slightly higher than U.S., reflecting lower starting valuations)
• U.S. bonds: 4.5-5.5%

These are modestly more conservative than the historical 10-5-3 benchmarks for U.S. stocks, primarily because U.S. stock valuations (as measured by price-to-earnings ratios) are elevated relative to historical norms. Higher starting valuations generally predict lower future returns.

The CAPE ratio (Cyclically Adjusted Price-to-Earnings), developed by Nobel laureate Robert Shiller, has historically been one of the better predictors of 10-year forward returns. When CAPE is high (as it has been since the mid-2010s), expected future returns tend to be lower than the historical average. This does not mean stocks are about to crash. It means the 10% historical average may be somewhat optimistic for the specific decade ahead.

How to Use the Rule Practically

Use the 10-5-3 rule as a sanity check, not a precise calculator. Specifically:

If someone promises you guaranteed returns above 10%, that is a red flag. The most reliable stock market in human history has averaged 10% annually, and that includes enormous volatility. Anyone promising more with less risk is either uninformed or lying.

If you are deciding between keeping money in a savings account versus investing it, the 10-5-3 rule shows the long-term cost of staying in cash. The difference between 3% and 10% on $50,000 over 30 years is the difference between $121,000 and $872,000.

If you are building a retirement portfolio, the rule gives you a framework for expected income. A portfolio returning 10% annually and following the 4% withdrawal rule can sustain approximately 4% withdrawals indefinitely (in theory). A portfolio returning 5% can sustain smaller withdrawals without depleting principal.

Frequently Asked Questions

Is the 10% stock return still realistic today?

Over the very long run, probably close to it, though most financial forecasters expect the next decade to produce returns slightly below that historical average given current valuations. A planning assumption of 7-8% for a diversified stock portfolio is more conservative and arguably more responsible for someone building a retirement plan.

Why did both stocks and bonds fall in 2022?

In most recessions and market downturns, bonds rise when stocks fall, because investors flee to safety and bond prices go up as yields fall. In 2022, the problem was inflation. The Fed raised rates sharply, which pushed bond prices down at the same time stocks were falling. A 60/40 portfolio lost roughly 16% in 2022, one of its worst years in decades. The 10-5-3 rule, which assumes bonds provide a cushion, failed precisely then.

Does the 3% savings rate account for high-yield savings accounts?

Not really. The 3% is a long-run average, and during 2010-2021, most savings accounts paid far less than that. The rule is best interpreted as a ceiling for cash returns over the long run, not a guaranteed floor. At current rates (early 2025), many HYSAs pay around 4-5%, which beats the rule's estimate. But those rates will fall when the Fed eventually cuts rates again.

Should I put everything in stocks since they return the most?

That depends entirely on your time horizon and your ability to handle volatility without panic-selling. Stocks can fall 30-50% in a single year and take years to recover. If you are 30 years from retirement, a 100% stock allocation is defensible. If you are 5 years from retirement, a major crash at the wrong moment can permanently impair your retirement income. The right allocation depends on your timeline, income needs, and psychological tolerance for watching your portfolio drop.