Strategies for investing at different life stages - the universally applicable guideline for successful investments
The "100 minus your age" rule is a popular investing strategy that helps individuals determine the percentage of their portfolio to allocate to equities (stocks) and lower-risk assets like bonds. This rule, which was first discussed in the 1980s, suggests that the difference between 100 and your current age represents the percentage of your portfolio that should be invested in stocks, with the remainder in lower-risk investments.
For instance, a 40-year-old following this rule would invest 60% (100 - 40) in stocks and 40% in bonds or other low-risk investments. Similarly, a 25-year-old might invest 95% (100 - 25) in equities, with only 5% in lower-risk assets.
This rule is designed to reduce risk as one ages, with younger investors taking on more risk for potentially higher growth and older investors shifting towards safer, more stable investments as they approach retirement. Variations of the rule, such as "120 minus your age," exist to reflect potential longer life expectancy and tolerance for risk, meaning higher equity exposure for the same age.
However, it's important to note that the "100 minus your age" rule is a guide, and how you invest depends on your goals and life expectancy. For example, a 70-year-old might still maintain a high stock allocation if they have sufficient emergency funds and a long-term investment horizon, since equities provide better protection against inflation over time than bonds.
In current economic environments where bond yields are low, some experts argue that the rule is somewhat outdated. Critics suggest that it oversimplifies investment allocation by focusing solely on age rather than individual factors such as investment goals, time horizon, income needs, and risk tolerance.
Despite these criticisms, many financial advisors still find the formula valuable as a starting point or guideline for asset allocation planning. Another strategy to consider is the 'rule of 72', which helps determine how long it takes to double your money based on your estimated rate of return. By dividing 72 by your estimated rate of return, you can estimate how long it will take to double your money. For example, with an 8% return, it would take 9 years to double your money.
In conclusion, the "100 minus your age" rule is a useful tool for gauging the proportion of stocks versus low-risk investments, but it should be adapted based on individual circumstances and current market conditions rather than used as an absolute rule. It's always recommended to consult with a financial advisor to create a personalised investment strategy that aligns with your financial goals and risk tolerance.
Based on the "100 minus your age" rule, a 30-year-old investor might allocate 70% of their savings to equities and the rest to low-risk investments like bonds, demonstrating a personal-finance strategy that takes more risk for potentially higher growth. In contrast, a 65-year-old investor may opt for a more conservative approach by investing a larger portion of their savings in bonds, applying the investment concept to their business and financial life. This rule is just a starting point for determining asset allocation, with personal-finance goals, risk tolerance, and other factors playing crucial roles in final investment decisions. A strategic approach like the 'rule of 72' could also provide insight when deciding how to invest, offering a means to estimate the time it takes to double an investment's value based on the estimated rate of return.
