Sunday, April 11, 2021

100 Minus Your Age Investment – Rule of Thumb or Dumb?

Do you believe in reducing your equity allocation as you get older?

One of the most commonly cited rules of asset allocation is the 100 Minus Your Age Rule, which states that your portfolio’s equity percentage should be equal to the difference between 100 and your age.

Suppose that you are 40 years old now, 60% of your investment should be made in equity while the remaining 40% should be made in debt. 

Technically, it is attributed to the “Declining Equity Glide Path” or the idea of gradually reducing your risk as you get older. 

The lesser the age, the higher the capacity to take risks and brace the stock market’s backlash.

Although the 100 Minus Your Age Rule can be the most sensible solution to proportion your debt and equity, it has drawbacks that raise relevant questions. 

For one, it dismisses the change in expectancy rate that has significantly increased over the decades and has been improving globally. 

This study shows life expectancy charts across the world. South Korea’s life expectancy almost quadrupled while the UK’s doubled and is now higher than 80 years.

Another loophole of this rule is the change in interest rates. 100 Minus Your Age Rule was formulated in a time when bond returns were higher than they are today. 

This chart shows how interest rates dropped below 2% from the roughly average 6% of the last decades, making the 100 Minus Your Age Rule makes it less useful today.

Planning your retirement is no easy task because of the varying factors that differ from each person. 

We may never correctly allocate the right amount of equity and debt but to plan it right is possible if it is not solely based on a single criterion.

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