100 Minus Age Investment Rule | How Much To Invest In Equity

Do you ever wonder as to how can you decide the proportion of your investment in equity and debt, govt. bonds etc. like other instruments ? The 100 minus age investment rule comes as a savior and helps you to take this decision. Read this article delight to find more .

What Is 100 Minus Age Investment Rule ?

According to the 100 minus age principle, individuals should hold a percentage of stocks equal to 100 minus their age.  The rest would comprise high-grade bonds, government debt, and other relatively safe assets.

Suppose your present age is 30 years old. Now, 100-your age (30) = 70. This means that 70 percent of your investments should be made in equity, while 30 percent of investments should be made in debt and other relatively safe assets.

Clearly, this example illustrates the simple idea behind the rule i.e., the lesser the age, the higher the risk-taking capacity and the ability to handle the weather storms of the stock market. However, as you grow old, the risk-taking capacity reduces, and you would need your money sooner. In that scenario, it is essential that you invest in fixed income securities which ensure fixed returns.

The Logic Behind 100 – Age Investment Allocation Rule

One of the primary factors that are considered while coming up with a suitable asset allocation is the age of the investor. Your financial requirements and goals might change as you grow older. The key objective behind asset allocation is to maximize return while minimizing risk. As you know, equities as an asset class have a very high-risk quotient. While fixed income or debt are known to be more stable investments. Having the right mix of various investment products within the asset classes lends the portfolio the much-needed diversification. This appropriate diversification leads to proper wealth appreciation alongside capital protection. It also plays a role in reducing an entity’s tax liabilities, as different types of assets attract different taxation. In this regard, the rule supports the concept of ‘declining equity glide path’ where you decrease the allocation to equities each year or once every few years. This leads to reducing volatility and risk level in your portfolio. The older you get, you would want to have capital security and may become risk-averse. 

Will the 100 minus age solve all your worries?

At the age of 30, your risk-taking capacity is high, and you can afford to spend a significant chunk of your wealth in equities (70%). But what if you plan to retire early say at the age of 50? Indeed, you will require your money sooner, but since due to the 100 minus age rule, 50 percent of your wealth will be invested in equities where the risk and return varies making your early retirement plan unsafe.

Also, risk appetite is a function of another important factor that is income. What if your income does not allow you to take risks even when you are young, say 30 years? You cannot rely on equities solely based on your age.

Apart from the risk appetite, other factors, which should determine your investments, are your time horizon and your financial goals. Investment in equities requires a longer time frame. So if you are willing to stay invested for a shorter time frame, debt funds should be your priority irrespective of age.

Hence , it is essential to be clear and aware of your risk profile and short term & long term goals before following the thumb rule blindly.

For further insights : https://www.investopedia.com/articles/investing/062714/100-minus-your-age-outdated.asp

Final Takeaway

Financial planning revolves around figuring out the appropriate mix for asset allocation. Various factors affect the amount of weightage given to different asset classes like equities and fixed income, commodities, or real estate, that make up an individual’s portfolio. The 100 minus age rule is one of the oldest rules of asset allocation, which gives a sensible solution to decide the proportion of debt and equity in your portfolio. However, There is no straight-jacket method of figuring out the best asset allocation for everyone. You cannot accurately anticipate future periods of market upturns and downturns. Therefore, it is best to build a portfolio while planning for the worst and hoping for the best.

Read also : How to select Monopoly Stocks to invest | Delivery Trading Strategy ( https://thebrightdelights.com/how-to-select-monopoly-stocks-to-invest-delivery-trading-strategy/ )

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