The Buyt Desk
The 100 minus your age rule is a common thumb rule that can help you in deciding your asset allocation. Subtract your age from 100 and the answer will indicate what portion of your investment should be in equities and the rest could be invested in debt or other fixed-income investments. Suppose your age is 30 and apply the formula to find out your equity allocation lets apply this rule-
Age -30
Formula- 100 – 30 = 70
According to this rule, 70% of your investment should be in equities and the remaining 30% should be in debt.
Let us increase the age by 10 more years and see what this formula suggests for a 40 year old person-
Age – 40
Formula- 100-40 = 60
As per the rule, a 40-year-old’s exposure to equity could be 60%.
What this formula does is as you grow older the portion of equity allocation decreases. This formula could be a good way to give you an idea but can it be a rule that can guide your investment decision? One size can’t fit all and thus one formula can’t be right for all.
Can Your Age Decide Your Investment’s Asset Allocation
Age cannot be the only deciding criteria for your investment plans. Your asset allocation choice will primarily depend upon your goals and risk-taking abilities. A 30-year-old single person’s asset allocation will be very different from a same-age person who is married and has young children to support. This is because the risk-taking abilities will be totally different.
Let us understand this with an example. Abhay and Karan are both 35 years old. Abhay works with an MNC. Abhay’s wife works in a law firm. Both of them want to focus on their career and not plan to go the family way for a few years. Karan is also 35 years old working with an AD agency. His wife had to quit her job because they didn’t have a support system to take care of the young child. Karan also takes care of his parent’s expenses too. Despite the fact that both Abhay and Karan are 35 years old and as per the 100- your age (35) formula is concerned they need to have a 65% allocation to equity. But given Karan’s situation, he needs money for his parents’ health needs and in near future for his child’s education. He really can’t have bigger equity exposure. The 100 minus your age rule only gives consideration to your age and not each individual’s unique circumstances and goals.
How to plan asset allocation?
Pick equity allocation as per your time length of the investment. If you have a near term 3 year goal then it’s wiser to concentrate your investment towards short term debt funds or a conservative bank FD could also work for you. When you have a long term goal of 10-15 years like you want to invest for a childs higher education. For long term goals, you could split the equity and debt exposure into a half- 50:50 portfolio i.e 50% in equity and 50% in debt. What about goals that are important but have a long time to come? Goals like retirement have usually a long waiting period. If you start early you may have 15 to 20 years in your hand. For this kind of goal, you can take a larger exposure to equity and have a mix of 75% in equity and 25% towards debt.
These thumb rule are good to read. They give us a magic number and make it sound so easy. But beware that investment decisions can not be made based on just your age.
