The easiest asset allocation method- 100 minus your age rule:
It’s always difficult to decide how much you should save and how much you should invest. The answer varies on the different stages of life. The investing strategy of a 22-year-old need not to be same as that of a 60-year old.
But, how much you should actually invest in different assets at the particular stage of your life?
There is no single answer to this question and there can be multiple correct answers.
However, it this post I’m going to suggest you one of the easiest asset allocation method, known as the 100 minus your age rule.
100 minus your age rule:
This rule is quite old and is based on the basic principle of investing which says that you should reduce the risks as you get older.
The logic is simple. When you are old, you will have lot more responsibilities and expenses compared to when you’re young. For example, if you’re at 58, you might be worrying about the retirement fund, retirement home, higher education of your kids, marriage of your daughter/son etc.
On the contrary, when you are young, you do not have much expenses or responsibility. That’s why it is said to take more risks when you are young.
100 minus your age rule is based on the same principle of minimizing risks as you grow old and simplifies the asset allocation depending on the stage of your life.
How ‘100 minus your age’ rule works?
100 minus your age rule states that the percentage(%) of allocation of your wealth in equity (stocks or mutual funds) should be equal to the 100 minus your age.
The rest amount should be allocated in safe funds like savings, fixed deposits, bonds etc.
For example, if your age is 45,
Then, your percentage allocation in equity = (100- 45) = 55% of your net worth
Percentage allocation in safe funds= 45% of net worth
You can notice here that as you approach an age of 100, the risks are totally zero.
Moreover, please do not argue what about those whose age is above 100. Do you really think that they will be in a position to make investment decisions at that age?
The drawback of using ‘100 minus your age rule’:
Although this ‘100 minus your age rule’ make quite a sense for the asset allocation, however, there are few drawbacks of using this rule.
For example, from the last few decades, the life expectancy of the people are increasing. This means that you can stay invested in the equity (and take more risks) for few more years now.
Further, at any time, the asset allocation by an individual depends on the person’s financial situation. For example, if you have a large family with dependants on you, then you might not be willing to take many risks, even if you’re young. The ‘100 minus your age rule’ doesn’t takes care of the financial situations of the people.
100 minus your age is a simple, yet effective way to easily allocate assets depending on the particular stage of your life.
However, while deciding the asset allocation, you should also keep in mind your priorities and financial situation.
That’s all. I hope it post is useful to the readers. Happy Investing.