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.
Certainly! The '100 minus your age' rule is a popular guideline in asset allocation, aiming to balance investment risk based on an individual's age. This principle suggests that the percentage of your portfolio allocated to equities should be determined by subtracting your age from 100, with the remainder being assigned to low-risk bond assets. The idea behind this rule is to gradually reduce exposure to riskier equities as one ages, shifting towards more stable bond investments.
As an enthusiast in financial planning and investment strategies, I can confirm that this rule serves as a simplified approach to asset allocation, considering the changing risk tolerance and investment horizon associated with age. For instance, at 20 years old, following this rule would entail an 80% allocation to equities and 20% to bonds. Meanwhile, at 50 years old, the allocation would be 50% to each asset class.
The rationale behind reducing equity exposure as one ages lies in minimizing the impact of market volatility on retirement funds. As individuals approach retirement, preserving capital becomes more crucial, and a higher proportion of bonds, known for their stability, helps mitigate the risk of sudden market fluctuations.
The article also touches upon the concept of "de-risking" or "life styling," which refers to the strategic adjustment of investment portfolios over time to reduce exposure to riskier assets. This adjustment is intended to protect the portfolio from potential volatility that could jeopardize retirement income.
Furthermore, the article discusses the potential hazards associated with maintaining a high equity proportion in later years. This includes the risk of being forced to sell equities at a loss during market downturns, which can significantly impact the overall portfolio value and future income.
Modern portfolio management has evolved to incorporate diversified strategies, utilizing short, medium, and long-term investment portfolios. This diversification allows for various levels of risk exposure across different time horizons, aligning with individual financial goals and risk tolerances. The mentioned rules like the "72 rule" (used to estimate the time required to double an investment at a fixed annual rate) and the "10, 5, 3 rules" (potentially related to diversification or risk management strategies) might be additional concepts considered within this evolving framework.
Overall, this article reflects the conventional wisdom prevalent in the realm of financial planning and investment management, emphasizing the importance of adjusting asset allocation based on age and employing diversified strategies to mitigate risks associated with market volatility.
