Thursday, December 6, 2012, AM | 2 Comments
Many finance gurus suggest that investors should act aggressively at younger age and conservatively when they are retired or close to retirement. There is a formula or rule that, even though, was created long time ago but still many finance experts tell us it works under any condition of the stock and bond markets.
Aggressive investing means putting more money in stocks than anything else. Conservative investing means the less investment in stock the better.
Basically, the rule of 100 states that you take your age and subtract it from 100 to arrive at the approximate percentage of your portfolio that should be held in stocks. The rest should be allocated to cash and high-quality income and bonds.
Following the Rule of 100 by example…
So following the Rule of 100, a 25-year old who is just starting out in life, would have roughly 75% of his/her assets in stocks and higher-risk assets, with 25% reserved for cash and secure income options.
Conversely, a 75-year-old would have just 25% of his/her assets in stocks, with the balance in short-term income. The idea, of course, is that as you get older, your portfolio should become more conservative.
Not many investors follow the Rule of 100…
Very few investors follow this rule. On the contrary, recently we have known now that at any age, investors have lost a lot of money just because they were so heavily invested in stocks.
When the credit crisis started to unfold, many 65-year-old retirees had 60%, 70%, even 80% of their assets in stocks. Many of them were customers of large national brokerage firms.
In fact, it has been estimated that one of the reasons many financial advisers don’t push more conservative, income-oriented products is that they generally don’t carry the fees that stocks and stock mutual funds do.
In a Nutshell
Of course, individuals live longer today than when the “Rule of 100” was first created, but the basic idea is unchanged.
Even in the most bullish of bull environments, how can a 75-year-old really have 75% of his/her assets in stocks? They should stay away from heavily invested in stocks.Facebook.com/doable.finance