Is the thumb rule 100 minus age relevant today?

Is the thumb rule 100 minus age relevant today?

Henil Shah
/ Categories: MF Unlocked

The 100 minus age is one of the oldest thumb rules of asset allocation. Let's understand what is 100 minus age thumb rule all about, how is it calculated and what is its inference? The 100 minus age is one of the simplest rules of asset allocation. It shows you how much equity you must have and how much debt you must hold as of today, i.e., at your present age. It is simply calculated as 100 minus your age. Let’s understand this with the help of an example. Say your current age is 30 years then your asset allocation in equity would be 100 - 30, i.e. 70 per cent and whatever is your age i.e. 30 in our case would be in debt (30 per cent). So, this thumb rule tries to infer that lesser the age more the risk-taking capacity and more power to stand against the storm and vice versa.
 
There are various counters to this thumb rule. Many scholars say that if this is the case then investments in the name of a 10-year-old child must have 90 per cent in equity and 10 per cent in debt. However, that should not be the case. Even this rule would give wrong results as it doesn’t take into consideration the financial situation, risk-taking ability and investors psychology. There are now various other factors that one needs to consider before deriving their asset allocation. Asset allocation differs from individual to individual. Everyone will have their own unique asset of allocations.
 
So, what is the right way of allocating assets? There are various ways in which you may derive your asset allocation. However, the standard way must be to first derive your risk profile. Risk profile will help you understand the amount of risk you can withhold.  The second thing that needs to be considered is the time horizon for which you wish to invest. Based on your assessed risk profile and time horizon, the asset class may vary. For instance, if you are an aggressive risk taker and time horizon for investment is long-term then you can allocate maximum to equity mutual funds say up to 80 per cent or 90 per cent or even 100 per cent (100 per cent, if you are super aggressive type of investor) and rest to be in debt mutual funds. However, if your time horizon is short-term, then even if you are an aggressive risk taker, investment in debt fund is recommended. Though you can take equity exposure up to 5 to 10 per cent  if you are a super aggressive investor.

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