100 Minus Age Rule of Thumb for Investing - What is the 100 minus age rule?

You know that in order to make your investments successful, you need to diversify them, right? If you know that, it’s great. But do you also know in what proportion you need to make those investments into various diversifications?

This is where the 100 minus age rule comes in.

What is the 100 minus age rule?

This rule says that the percentage of equity assets in your portfolio needs to be equal to the difference between 100 and your own age. For instance, if your age is 30, then according to this rule, you need to invest 70% of your assets into equities.

One of the good things about the rule is that it supports the “Declining Equity Glide Path” concept. This is where you diminish the allocation you give to your equities each year or once every few years. This ultimately leads to the reduction of risk level and volatility in your own portfolio.

Now, the older you become, you need to have capital security and be risk-averse. This is exactly what the rule wants you to be or do. However…

Does the rule actually work?

In this rule, people’s ability to take risk is generalized, and the rule depends on just the age factor. However, can the rule be applied for one who is in his or her early 30s and who is risk-averse? The rule has to consider all factors like risk appetite, return requirements, planned time to reach goals, and other factors. These have to be considered for determining asset allocation.

Practical problems with the rule

This rule is not without its problems. For one, the rule assumes that for every one financial planning will be the same. But that is not the case. Financial planning depends on the individual. For instance, investing decisions depend on current assets, financial goals, future income potential and other factors. For instance, if you are 55 years of age right now and don’t plan to withdraw from your retirement accounts till you reach the age of 70, there are still many years to go before you can access your own money.

And if you want your funds to have more chances of getting a return of more than 5% a year in interest, investing 50% of your funds in stocks can be too conservative for your time frame and goals.