In my normal interaction with investors, I often ask them- Do you know 100 minus age rule ?
My next question is:
“How did you first begin to invest money into the investment avenue you chose then?”
Most of the investors don’t have a clue. Their present investment option is based on events : NFOs being heavily advertised; some MF declared a great dividend; some agent came knocking on their door to mis-sell; a nice property was advertised on the front pages of the newspapers.
Let me explain how the (100-x) thumbrule can be broadly used to decide where to invest money. This is same as the 100 minus age rule in investing.
What is 100 minus age rule in Investing?
Consider two investors; the first is 22 years of age. Let’s name him Aadi. The second investor is 55 years of age, we’ll call him Manav. Aadi Manav are two people who are poles apart – Aadi is young and starting to earn; Manav is nearing retirement and should have already stashed a lot of monies for his old age.What would the asset allocation of these people look like?
The answer lies in the (100-x) rule : A person will invest approximately (100-x) % of his money in equities; where x is the age.
So for Aadi, (100-x) = (100-22) = 78% of his money should be in equities. This is but natural as Aadi is young and he can take a lot of risk. If he has 1 lakh rupees, he can put Rs 78,000 in equities. Should equities crash,
Aadi, who is young, still has age and a huge working life span to earn that money. Also, equities are the only asset classes that return the most amount of money over a long period of time. So, if Aadi implements this rule, he will ideally have a stash of money by the time he retires – that is, his Rs 78,000 will grow till his retirement into a significant corpus.
Now, that leads us to believe that Manav, who is 55, will only invest (100-55) = 45% of his money into equities? Wrong!! Manav cannot afford to lose 45% of his net-worth should equities crash – he has only 5 years of working life left to earn money that he would lose and that is a very small amount of time.
The conclusion is simple
young minds who have started to earn should have a huge equity allocation; folks in their mid-working-life-span should have some debt kicked in while people nearing retirement should have a huge debt allocation.
Let’s remember that the (100-x) rule is a thumb rule. You can use it intelligently but then you need to run your asset allocation by a financial planner before you put it into practice.
A person like Manav should put most of his money in debt; my suggestion is that he can invest not more than 15% of his money into equities. Some might even consider that huge. Manav cannot take any risks at this age in his life – debt is his best bet.
100 minus age rule is an excellent way to start investing. Later on you need to figure it using risk analysis & goal analysis. A financial planner will help you with this.
Happened to come to this article by following the links one after another in your other articles.
The post seems very old & also no comments; I thought I would kick off.
Very good illustration of the thumbrule. AGE certainly plays a major role in defining one’s risk appetite.
@Sudip D, But then it is just a thumbrule to be used as a guidance.
If you go to a planner, he will do the asset allocation correctly but not use the thumbrule.
This is just a guidance.
@Radhey Sharma, hmm.. Ok.
An expert’s guidance is always better in the cruicial matters of life.
@Radhey,
Though its a thumbrule, I believe that we should invest about 80% in equity until age of 50. After that you must switch to debt funds.
Only if you invest in equity for a very long term you will get good returns. But then again Equity is not for faint-hearted.
Rakesh
@Rakesh, 80% in equity till age 50 is way too much risk. You cannot go by this rule blindly, the risk taking capacity of the person is the driving factor.
Even at age 40 a person might not be able to take risks and so should invest less in equity.
@Radhey Sharma, Hi Radhey, In my opinion two things have to be considered 1) as you said risk taking capacity 2) Time period of investing (or how soon you need that money) ex: If you had invested from age 27 till 40 for your children education then by 39 or 40 that total amount should be moved to FD or debt instrucment.
@Venkat, Yes that is right, expectation of return is also a factor.
@Radhey,
Agree, but if an investor is willing to take risk there is no harm in investing 80% in equity till 50 years of age. I personally believe in India’s long term growth and will be invest about 80% in Equity till the age of 50. Equity will outperform all other investment avenues in the long run.
Rakesh
Hi Radhey, in your article you forgot to consider one important and unavoidable factor; Aadi’s father 🙂
Aadi’s father will never let Aadi invest 78% in equities. Since Aadi is only 22 years old, he will like an “aagyakaari” son listen to his father. He will not bother about any financial planning thumb-rule, the only thumb-rule he will follow is listen to father when it comes to investing money. The father in reality is saving Aadi’s money and not investing it. The two words are used interchangeably by most Indians.
Now I’d like to propose two modified thumb-rules to fit Indian society: –
Assumption: Aadi is 22 years old and Aadi’s father is 52 years old.
1) (100-x), where x is Aadi’s father age. Hence investment in equities is (100-52) = 48%
2) (100-x-y), where x is Aadi’s age and y is Aadi’s fathers age. Hence investment in equities is (100-22-52) = 26%
This equation is for more conservative families or risk averts.
I know this sounds funny but isn’t it true in our society?
@Vivek,
Nicely explained but then again it depends on individual’s risk appetite. If a person is willing to take risk then he should put in more money in equity. Though i am in my mid 30’s my equity investments is over 80% and infact during the crash couple of months back i topped it over to 90% but as the market has recovered strongly sold some of them and brought it down to 85%. Today too market gave an excellent opportunity to sell. It has been one-way traffic since last month or so and a healthy correction is just round the corner.
@Rakesh, Hmmm, you are timing the market 🙂 !!!
@Radhey,
No one can time the market, i am just fancying my chances to make some quick money. I have been profit booking since 5200 level in nifty thinking that it will correct and today it touch 5400……
Rakesh
@Vivek K, It is, it indeed is.
Anyways, this is a thumbrule so it needs to be tweaked for every case. Nice thought Vivek.