100 minus your age rule: It’s always tricky to decide how much you should save and how much you should invest. Especially in riskier investment options like stocks or mutual funds. This is because the answer varies on different factors like the age, geography, or financial situation of the person. Moreover, the investing strategy of a 22-year-old need not be the 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 correct answer to this question, and there can be multiple answers. However, it this post we are going to discuss one of the most popular allocation methods, known as the 100 minus your age rule.
What is 100 Minus Age Asset Allocation?
The 100 Minus Age Asset Allocation Rule is one of the earliest and elementary methods of Asset Allocation, which proffers a rational procedure to determine the distribution of equity and debt in the portfolio.
This rule is devised on the vital axiom of curtailing risks as we gradually turn old. It also interprets the Asset Allocation which is completely based on the stage of your life. Over time, various theories and models have been devised in an endeavor to lend advice about this crucial decision. The 100 Minus Age Asset Allocation Rule provides extensive assistance to decide the ratio of our investment in debt and equity.
The 100 Minus Age Asset Allocation Rule which states that we should take 100 as the minuend and our age as the subtrahend. The enumerated difference is the percentage of our network that we should be designating in stocks as of today, i.e. at our current age.
Examples of 100 Minus Age Asset Allocation Rule
At first, we will decode the definition by taking a person belonging to the younger age bracket.
AGE OF AN INDIVIDUAL: 22 YEARS
As per the definition, we will subtract it from 100.
(100-22) Years = 78 Years = 78/100*100= 78 %
Thus, according to the rule, he/she should keep 78% of his/her portfolio in equities. The rest of the portion should include high-grade bonds, government debt, fixed deposits, and other relatively safer assets. On the other hand, when he/she reaches the age of 80, he/she would diminish his/her allocation to stocks to just 20%.
Now, we will explain the definition by taking a person belonging to the older age bracket.
AGE OF AN INDIVIDUAL: 67 YEARS
As per the definition, we will subtract it from 100.
(100-67) Years = 33 Years = 33/100*100= 33 %
Thus, according to the rule, he/she should keep 33% of his/her portfolio in stocks or riskier investment options. The rest of the portion should include high-grade bonds, government debt, fixed deposits, and other relatively safer assets.
How does the 100 Minus Age Rule work?
The logic is simple. When you are old, you will have a lot more responsibilities and expenses compared to when you’re young. For example, if you’re at 58, you might be worried about the retirement fund, retirement home, higher education of your kids, the 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 considered wise to take more risks and invest in high risk, high return investment opportunities when you are young.
In professional vocabulary, this is attributed as a “Declining Equity Glide Path.” Every year or, at an interval of a few years, we would have to decline our share in equities which in turn will diminish the volatility and level of uncertainty of our investment portfolio.
As we get older, one of the most essential guidelines of investing is to eventually scale down our risk level since retired personnel get no scope for second chances in reference to the revival of the market after a sharp plunge. Therefore, this example depicts the simple perception behind the 100 Minus Age Asset Allocation Rule that strives to conclude that lesser the age, higher the risk-withstanding capacity & more the age, lesser the competency to combat the storm of the stock market and vice versa.
Drawbacks of the 100 Minus Age Rule
100 Minus Age Asset Allocation Method comprises of several loopholes. Let us analyze each of them in a detailed discussion.
1. Presumption of the fact that the process of financial planning is similar for everybody
The ultimate truth is that the procedure of financial planning varies from person to person where everyone has their exclusive preference and needs for Asset Allocation.
2. Inconsiderate about the basic factors for asset allocation
Asset Allocation requires a well-defined consideration of diversified factors like financial situation, preferences, risk-taking ability, time horizon, goals, and investors’ psychology.
However, the recognized path to asset allocation is to elaborate our risk profile at the very first stage. Assessing our risk profile will aid us to contemplate the approximate risk we are ready to undertake for the investment.
The second thing that needs to be taken into account is the time horizon for the purpose of investment. On the basis of the analyzed risk profile and time horizon, the decision regarding the asset class is executed!
For example, if you are an aggressive risk pursuer and have a long term time horizon for investment then you can allocate a major portion of your asset to equities. The percentage can be 80 % or, 90% to stocks and rest into debts. In exceptional cases, if you are someone having a supreme risk appetite, you can even invest 100 % of your assets. On the contrary, if you have a short time horizon in your mind, then it always recommended investing in a debt fund despite being an aggressive risk-taker.
3. Inconsiderate about the change in Life Expectancy
Over the past few decades, there has been an unwavering increment in life expectancy around the globe. The hike is driven mainly by improvements in medical facilities and infrastructure. However, as the majority of the people have started surviving longer than before, many financial advisors feel that there is a dire need for amendment in the rule.
According to experts, the modified figures should be closer to 110 minus the age or, 120 minus the age. There is another aspect that has been absolutely overlooked by the 100 Minus Age Asset Allocation Method. On average, women live nearly four to five years longer than men and thus, required corrections definitely need to be made in the rule to cater to the investment needs of women population.
4. Inconsistent results in reference to market fluctuations
Academicians and researchers had commenced a project to test the accuracy and performance of the 100 Minus Age Asset Allocation Method aka Declining Equity Glide Path in different market cycles. Intensive research reports display that in bear cycles or, during poor market conditions, this method has delivered distressing outcomes. In reference to the market happenings of 1966, if somebody retired during that year, they would have run out of money 30 years after retirement.
The same experiment was also applied to a bull cycle or, in strong market conditions. During the booming period, the 100 Minus Age Asset Allocation Method generated good results with the strongest ending account values. However, it is not possible to predict or foresee future market performances at the time of an individual’s retirement. Thus, it would be wise to chalk out a sound allocation method that sails through the crests and troughs of the stock market.
The 100 minus your age is a simple, yet effective way to easily allocate assets depending on the stage of your life. This age rule is based on the principle of minimizing risks as you grow old and hence, simplifies the asset allocation. However, this rule also has a lot of drawbacks and hence while deciding the asset allocation, you should keep in mind your priorities and financial situation.
That’s all. I hope it post is useful to the readers. Happy Investing.