Investing, Personal Finance ·
I overheard a friend of mine say that he was having difficulty selecting investment options within his 401(k). With such a long time-horizon, he was aware of the aggressive strategy he should have (more stocks than bonds), but he wasn’t sure of the exact allocations. For someone with such a dilemma – uncertain as to what asset allocation they should have – the Rule of 100 is reliable.
Simply put…
More specifically, the Rule of 100 exemplifies how much risk an investor should take at a specific age.
To simplify the Rule of 100 calculation: You should have your age invested in bonds, and 100 minus your age invested in stocks.
Rule of 100 Example:
Let’s use me as an example.
100
– 26 (age)
= 74% invested in equities
See Also5 Smart Money Habits That Protect You From Financial Crisis - CreateBlogEarnWhat Should I Invest In? - Clo Bare Money Coach100 foreign funds get tax demands; total bill may hit $10-bnMost-Overlooked Tax Breaks for Retirees and People Over 65= 26% invested in bonds
The Rule of 100 assumes every investor of the same age has similar risk tolerances, which is not the case. I have encountered a 25 year-old that cringes at the thought of losing a dollar and an 85 year-old that will (without hesitation) bet half of her net worth on black. We are all different…so tweak accordingly.
A common adjustment to the Rule of 100 is to add 10% to equities if you are a risk taker and subtract 10% from equities if you are risk averse. So if you are a strapping young lad with a white-haired woman trapped inside of you, it’s fine to go 65-35. In the Intelligent Investor, Benjamin Graham warns never to go outside of 75-25.
- But what if you have 40 years until retirement and historically stocks will outperform bonds? Wouldn’t it make more sense to be 100% equities?
- But haven’t bonds actually outperformed stocks over the past 30 years? Wouldn’t it make more sense to put 100% in a “less-risky” investment that yields higher returns?
Both of these questions are correct. Over the long-term, stocks have seen the highest gains among traditional investments. Also, according to Bloomberg, over the last 30 years (which is a pretty long-term, no?) long-term government bonds have gained 11.5% a year beating the 10.8% increase in the S&P 500. Even so, it would be a great risk to allocate 100% of your portfolio to either investment.
What do you all think of the Rule of 100? Is it useful? Is it completely wrong?
A Blinkin
Hunter, aka A. Blinkin, is the blogger behind Funancials. His experience in banking, lending, payments and investments has earned him the title of "Personal Finance Guru." In addition to helping people with their finances, Hunter enjoys crunchy tacos, open mouth kisses from his 2 baby boys and writing in third person.
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