As the saying goes, don't put all your eggs in one basket. So, what is the best way to build wealth whilst balancing your financial risks at the same time? For decades, a commonly cited rule of thumb, 100 Minus Age Investment Allocation Rule, has been adopting by many investors.
The 100 Minus Age Investment Allocation Rule is relatively a simple asset allocation method to be easily understood by all, which uses “age” as an indicator to determine the high-risk asset allocation that you may take. We can simply subtract our actual age from 100 to calculate the percentage of asset allocation. For example, when you are 25 years old, you can consider investing 75% of assets in higher-risk financial instruments, including equities and equity funds and the like, while allocating 25% to fixed-income assets or cash. According to the rule, the younger you are, the more money you can invest in higher-risk assets; conversely, the older you are, you should invest less money in high-risk assets.
The principle behind the rule is that the younger you are, the longer the investment horizon you will have and hence the ability to withstand the fluctuations of the stock market you possess. So, you are more capable to withstand more risky investment in exchange for higher return in the long run. On the contrary, as you grow older, especially when approaching to retirement age, the risk-tolerance capability deteriorates. Elderly are thus recommended to invest in more stable financial tools to avoid losses from market volatility and for achieving a balance between risk and reward.
The 100 Minus Age Investment Allocation Rule is a good start to help asset allocation and to diversify investment risks. But after all, it's just a general advice. How much should be invested in high risk assets depends not only on one’s age but also on the individual's risk tolerance as well as market conditions. Some young people may feel insecure on risky investments while some middle-aged people may want to achieve their retirement goals as soon as possible and tend to invest in high-risk investments. On the other hand, stock prices may fluctuate seriously from time to time. It is therefore essential for us to recognize our own financial goals and regularly review and adjust our financial plans so as to choose the appropriate investment strategy.
(The above contents are for reference only. Investment involves risk. If you have investment need, please consult relevant professional for investment advice.)
References：
- Abich, A. 2020. Impact Partners BrandVoice: Seven Steps Toward A Long-Lasting Retirement – Step 4: Create A Strategy That Includes Protection And Preservation Of Principal Plus Growth Potential. Retrieved from https://www.forbes.com/sites/impactpartners/2020/01/27/seven-steps-toward-a-long-lasting-retirement--step-4-create-a-strategy-that-includes-protection-and-preservation-of-principal-plus-growth-potential/#4280a6f031b0
- Anspach, D. 2020. How an Equity Glide Path Affects Investment Risk in Retirement. Retrieved from https://www.thebalance.com/what-is-an-equity-glide-path-2388560
- Chowdhury, O. 2020. 100 Minus Your Age Rule - The Easiest Asset Allocation Method! Retrieved from https://tradebrains.in/asset-allocation-100-minus-your-age-rule/
- Gaurja Newatia. 2019. What is the 100 Minus Age Investment Allocation Rule? Retrieved from https://blog.finology.in/investing/100-minus-age-rule
- Mak, S.-yun. (n.d.). We can retire immediate if we receive a big buck of money? Retrieved from (Chinese Edition Only) https://minisite.mpfa.org.hk/mpfie/tc/tools-resources/topic4/
(This is a translation only. The original article is written in Chinese and you may refer to the original version here for exact meaning).