Transcript
The ‘100 minus your age’ rule.
The ‘100 minus your age’ rule is another asset allocation rule. 100 minus your age gives you the percentage in equities with the balance going into low-risk bond assets.
For example, at age 20 you need 80% equity and 20% bonds. For age 50, equity comes out at 50% and bonds 50%. The idea is that as you get older you move out of equities and into lower risk bonds. Advisors call this de-risking or life styling. Received wisdom is that in later life having a high proportion of equities creates a hazard to income, if the short term value of the portfolio suddenly moves up or down in value as a fund can’t recover.
It’s like being forced to sell equities when markets are down… you don’t want to do it! Thankfully, managing your pension is now much more sophisticated with short, medium and long term portfolios the norm, rather than having all the money in one portfolio. Medium and long term pots can, therefore, have higher exposure see the 72 and 10,5, 3 rules.
Article is accurate at date of writing.
I'm well-versed in investment strategies and asset allocation principles. The '100 minus your age' rule is a popular guideline used in financial planning for asset allocation, especially in retirement planning. This rule suggests that the percentage of your portfolio allocated to equities should be determined by subtracting your age from 100, with the remaining percentage allocated to low-risk bond assets.
For instance, at age 20, the rule advises an 80% allocation to equities and 20% to bonds. As you age, the equity portion decreases, so at age 50, it recommends a 50% allocation to equities and 50% to bonds. The rationale behind this strategy is to gradually reduce risk exposure by shifting from higher-risk equities to more stable bond investments as you approach retirement age.
The concept of 'de-risking' or 'life styling' is integral here, emphasizing the importance of gradually transitioning into more conservative assets to protect one's portfolio from market volatility. As individuals near retirement, having a significant portion of their portfolio in equities could be risky because market fluctuations might significantly impact their income if they are forced to sell equities during a downturn.
The article touches upon the concept of portfolio diversification by mentioning the evolution of pension management. It highlights the shift from placing all funds in a single portfolio to spreading them across different time horizons - short, medium, and long term. This diversified approach helps manage risk more effectively. The 72, 10-5-3 rules are likely mentioned in relation to financial planning concepts or strategies, possibly tied to investment growth, interest rates, or retirement savings calculations.
Furthermore, the reference to 'short, medium, and long term portfolios' indicates the adoption of a more sophisticated investment strategy, allowing for varying levels of risk exposure across different timeframes. By segmenting portfolios based on time horizons, investors can tailor their risk profiles to align with their specific financial goals for each period.
Overall, the '100 minus your age' rule serves as a foundational principle in asset allocation strategies, promoting a gradual shift from equities to bonds as individuals age, aiming to strike a balance between growth and risk mitigation in investment portfolios.
