This rule recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments. For example, a 30-year-old would allocate 70 per cent to equities and 30 per cent to debt based on this rule.

What is 100 minus age rule?

The '100 minus age' rule, which is basically seen as a rule of thumb for asset allocation, suggests a high equity exposure if you're young. In simple words, the rule suggests subtracting your age from 100 to determine the percentage of your portfolio that should be invested in stocks (equity). The remaining amount should be in lower-risk assets like bonds, balancing growth potential with stability as you age.

100 minus age rule: How does it work?

Let's understand with some examples:

• At 30 years old: 100-30 = 70. You would have 70% in stocks and 30% in debt/bonds.
• At 50 years old: 100-50 = 50. You would have 50% in stocks and 50% in debt/bonds.
• At 70 years old: 100-70 = 30. You would have 30% in stocks and 70% in debt/bonds

Benefits of 100 age rule

The 100 minus age rule is easy to understand and helpful for beginner investors, especially those who are not familiar with how to divide their money across different types of investments. These encompass:

Simplicity and user-friendliness: The rule is straightforward to understand and implement. Anyone can easily calculate their desired equity allocation by subtracting their age from 100.

Supports concept of using age to guide risk management: The rule supports the concept that younger investors, with extended investment horizons, can continue higher levels of risk and, consequently, allocate more towards equities. In contrast, older investors approaching retirement should prioritise stability and income, resulting in a higher allocation towards debt.

Serves as an initial talking point: The rule can serve as a useful starting point for discussions when consulting a financial advisor. It establishes a foundation for your risk tolerance and preferred asset allocation, enabling the advisor to tailor the strategy more closely to your circumstances and objectives.

100 minus age rule: Does this rule always work?

This rule encourages investors to establish asset allocation. However, this rule overlooks several other factors, such as whether an individual has an early retirement goal, income uncertainty, and risk appetite. A personalised approach considering financial goals, dependents, and investment horizon, is crucial for effective asset allocation. Therefore, it is recommended by many experts that one should not blindly follow the 100 minus present age rule for deciding asset allocation.

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(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)

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