Dont blindly follow 100 minus present age rule for deciding asset allocation; factor these in your asset allocation A personalized approach considering financial goals, dependents, and investment horizon is crucial for effective asset allocation
Abhishek Gupta, 33, is a freelance digital marketer, and he is aiming to retire by 60. With two young children and a working wife, he has built a portfolio of largecap stocks, fixed deposits, and PPF for retirement. His main dilemma is deciding the right asset allocation. Friends suggest the ‘100 minus age’ rule; at 33 years, this means 67% equity. Is this rule right for him?#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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The ‘100 minus age’ rule suggests that younger investors can take higher risk. So, at 33, Abhishek Gupta should ideally have 67% equity exposure. However, this rule overlooks key personal factors.
If Gupta retires early, say at 50, his portfolio will still have a heavy equity allocation, risking capital erosion after retirement. On the other hand, a 50% debt allocation may not generate inflation-adjusted returns for a long retirement. If he postpones retirement to 70, the rule would unnecessarily push him to reduce equity exposure and miss out on higher returns. Clearly, the rule fails to account for individual goals, timelines, and income needs.
Moreover, is risk appetite only a function of age? Gupta’s active income is uncertain, which means that he may not be able to afford the risk of heavy allocation to equity. His wife’s income may be enough to manage the routine household expenses and support the education of two young children. However, he needs a stable investment portfolio to make up for his income uncertainty.
Clearly, the proportion of equity in Gupta’s portfolio depends on his risk appetite, which is shaped by both his ability and willingness to take risks. Linking the same to age is an oversimplification. It might sound a tad complicated, but he must consider his financial goals, number of dependants and investment horizon making asset allocation decisions.
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Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
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This story originally appeared on: India Times - Author:Faqs of Insurances
