Tips To Follow Rule Of 100 When Investing
Thursday, December 6, 2012, 2:00 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.
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2 Responses to “Tips To Follow Rule Of 100 When Investing”
By Martin on Dec 7, 2012, 1:43 am | Reply
I don ot agree that larger exposure to stocks can ruin your portfolio. I think it is a myth. If you are young, let’s say 25 and have 30 years of saving in front of you, you can afford having even more money in stocks (be leveraged up to 200%). No recession, crisis or correction lasts for 30 years. When you take a look at recent crisis in 2008, even if you were heavily invested in stocks, then yes, by March 2009 your portfolio may have lost 60 or so percent, but look at today’s prices. If you were buying more during 2008 – 2009, you could make all your loses up and actually beat the S&P 500 at this point. As you age, you start deleveraging your portfolio. I have been practicing this strategy for three years and my portfolio is fast growing and never had margin call issues as well. But I agree that this may not be a strategy for everybody.
By Shafi on Dec 11, 2012, 5:12 pm | Reply
The Rule of 100 is general in nature and investors don’t have to follow it exactly to its core. However, it has worked for many.