The proportion of your money that you invest in categories such as stocks, equity mutual funds debt, and cash is your asset allocation, and you’ll often run across different formulas for asset allocation by age. After all, a 25-year-old should invest a little differently than a 70-year-old.
One rule of thumb that some people follow is this: Subtract your age from the number 100, and that’s the proportion of your assets you should hold in stocks. The rest can be invested in Fixed Income and other “safe” investments such as FDs & Debt Funds. Thus a 35-year-old should aim for having 65% of his assets in equity, while a 60-year-old should have 40% in equity.
Although, with age, your RISK PROFILE is another important factor to consider. And, mortality (chance of living till a certain age) is improving. So with Risk Tolerance, we also suggest using the formula of 110 minus age. But this is just a thumb rule and Risk Assesment is a more scientific way to do Asset Allocation.
In India, most of us are holding too much equity in our portfolios and not enough debt. The worst offenders are the investors who do not share the debt with their financial planner. They just keep on increasing equity just to keep riding returns. Eventually, risk multi folds in the portfolio and when the markets take a turn they lose substantially.
Although it is recommended to rebalance yearly, and another check would be asset allocation by age. However you go about it, give your asset allocation by age some thought. It can make a big difference in your financial security. We designed this infographic to figure what should be the likely asset allocation by age and what should ideally be your objective towards your portfolio. Have a look:
Infographic:
I hope this infographic will motivate you to choose an asset allocation that aligns with your long-term goals. Keep it steady by rebalancing regularly. As your needs and risk tolerance change, make changes as needed to stay in control.
If you liked this post do share it with your family and friends.
Want to discuss more? Please share your thoughts in the comments section below.
