Should you follow the "100 minus your age" rule?

• Level: Beginners
• Reading duration: 5 minutes

The "100 minus your age" rule is a longstanding rule-of-thumb that helps you allocate your portfolio between stocks and bonds based on your age. It’s been around for decades and is popular for three main reasons:

• It simplifies asset allocation.
• It provides a basic risk management technique.
• It could scarcely be easier to understand.

How does the “100 minus your age” rule work?

All you do is:

1. Take the number 100.
2. Subtract your age from 100.
3. The result is the percentage of your portfolio that should be allocated to stocks.
4. The remainder of your portfolio is held in high-quality government bonds.
5. You readjust your asset allocation every year by repeating the steps above when you rebalance your portfolio.

For example: At age 30: 100-30 = 70 % stocks, 30 % bonds At age 31: 100-31 = 69 % stocks, 31 % bonds At age 70: 100-70 = 30 % stocks, 70 % bonds

The rationale underpinning the rule

The “100 minus your age” rule aims to balance risk and return over time: Younger investors can afford to take on more risk with a higher allocation to stocks

• Your portfolio is relatively small at the start of your investing journey relative to your future earnings potential.
• Hence, you can more easily recover from market downturns because you have many investing years ahead, and the bulk of your contributions lie in the future.
• So it makes sense to prioritise equities early on, relying on their long-run growth potential to build your wealth over time.

Older investors nearing retirement are more focused on wealth preservation

• Later, you’ll want to protect your accumulated capital against major stock market crashes.
• Older investors have relatively little time left before retirement to bounce back from setbacks. Hence, the balance tilts towards reducing risk with defensive asset classes as you age.
• High-quality government bonds are the best tool for that job, as they tend to rise when the stock market retreats.

The important - and much underestimated - advantage of the rule is that it offers a simple mechanism to manage risk on your journey towards retirement. In the beginning, you’re a hopeful newbie investor with little to lose. The next thing you know, you’re greying around the temples and sitting on a substantial nest egg. It happens in a flash and, along the way, many people find it difficult to judge when they should dilute their equities with a large helping of bonds. It can be hard to admit that you may need to slow down a little, and that applies as much to investing as it does to life. The “100 minus your age” rule enables you to make the transition gradually, so that:

• 1 % less in stocks per year doesn’t seem such a huge sacrifice when equities have a stellar run.
• You become disciplined in adjusting your allocation annually without overthinking it or second guessing yourself.
• By the time you retire, you’re protected by a large bond allocation. You’ll be 65 % in bonds at age 65, if you follow the standard version of the rule.

Actually, we need to talk about that - because 65 % in bonds at retirement age may be too much.

Updating the rule

Contemporary work by retirement researchers implies that “100 minus your age” may be too bond-heavy for retirement planning. Sustainable withdrawal rate research based on historical investment returns suggests that a retirement portfolio should be no less than 40 % in stocks and perhaps should be as high as 60 %. One reason is that as people live longer, they need the growth provided by equities to support more years in retirement. However, it’s impossible to prescribe an optimal balance of stocks and bonds because individual circumstances vary so widely. Still, the “100 minus your age” rule has been updated to account for the greater contemporary emphasis on equities. The newer if less catchy variations on the rule are:

• 110 minus your age
• 120 minus your age

This allows for a higher stock allocation at all ages. Bear in mind that a 30-year-old would be 90 % in stocks using the “120 minus your age” rule. That’s a strong dose of equities, which may need to be adjusted downwards if you find market volatility hard to stomach. You may also want to adjust your equity sights downwards if you plan on retiring early.

Critiques and considerations

A key strength of the "100 minus your age" rule is its simplicity. A key weakness of the "100 minus your age" rule is its simplicity. That’s not a contradiction, it is simply an acknowledgement that a single rule-of-thumb cannot account for the full complexity of the world. Here are some key points to consider:

1. Geared to retirement: The rule doesn’t assist with financial goals other than a conventional retirement around age 65.
2. Ignores personal risk tolerance: Some 60-year-olds might be comfortable with a higher-risk portfolio, while some 30-year-olds might lose sleep over market volatility.
3. Neglects other resources: Other sources of income like pensions, property, inheritances or businesses may allow an investor to take more risk with their investment portfolio.
4. Lack of flexibility: Changing market conditions or personal circumstances may force suspension or adaption of the rule. For example, long periods of negative or near zero interest rates are associated with lower bond returns. Similarly, a diminished life expectancy reduces the relevance of the rule.
5. Sidelines other asset classes: The rule is silent on the usefulness of gold and commodities. Granted, stocks and bonds should always be your portfolio mainstays, but it's worth investigating the diversification benefits of alternative asset classes.

Is the "100 minus your age" obsolete?

Absolutely not. The rule has its limitations, but it is also extremely useful once you understand what it offers. As a starting point, the rule is hard to fault. And, due to the power of compound interest, just making a start is one of the best investing moves you can make. If you’re a beginner, and your objective is a relatively conventional retirement, then the rule (or one of its contemporary variations) offers a clear pathway for making asset allocation decisions and controlling risk. If you’re time poor or don’t want to become over-involved in portfolio management, then the rule is a very helpful guideline. Indeed, its principles underpin the workings of target-date retirement funds. But of course, the age of a person does not tell us everything about them. So there’s plenty of scope to develop a more personalised investment strategy that aligns with your individual circumstances and goals. Check out the justETF Academy to discover more useful articles that will help expand your investing knowledge.