1. “100 minus your age” rule is Equity Exposure Ratio (EER), where EER=100 minus your age.
2. This rule is widely used for investment portfolio asset allocation to determine the Equity percentage corpus for achieving long-term goals.
3. As per this rule, you should maintain an equity exposure of 100 minus your age at all times till your retirement, with the rest being in fixed income and other assets.
4. Subtract your age from 100 to find how much of your portfolio should have equity exposure.
• If your age is 30 years, your equity portfolio should be 70%.
• If your age is 40 years, your equity portfolio should be 60%.
• If your age is 50 years, your equity portfolio should be 50%.
• If your age is 60 years, your equity portfolio should be 40%.
5. The number of working years left decides your ability to invest in risky assets.
6. The lower the age, the higher the capacity to stomach risk, because you can afford to wait till the investment bounces back in case of a downturn.
7. The ability to take risks also differs across individuals but it should gradually come down as you grow older.
8. However, other factors also need to be taken into account before deciding this.
9. Those following this mechanical asset allocation need to stick to the financial plan regardless of the market conditions.
10. This is because some rebalancing should also take place automatically.
11. So, the equity component will go up in a bull market and this should result in moving a part of your equity assets to debt, and vice versa during the bear market.
12. This method also stops one from being swayed by crowd psychology.
2. This rule is widely used for investment portfolio asset allocation to determine the Equity percentage corpus for achieving long-term goals.
3. As per this rule, you should maintain an equity exposure of 100 minus your age at all times till your retirement, with the rest being in fixed income and other assets.
4. Subtract your age from 100 to find how much of your portfolio should have equity exposure.
• If your age is 30 years, your equity portfolio should be 70%.
• If your age is 40 years, your equity portfolio should be 60%.
• If your age is 50 years, your equity portfolio should be 50%.
• If your age is 60 years, your equity portfolio should be 40%.
5. The number of working years left decides your ability to invest in risky assets.
6. The lower the age, the higher the capacity to stomach risk, because you can afford to wait till the investment bounces back in case of a downturn.
7. The ability to take risks also differs across individuals but it should gradually come down as you grow older.
8. However, other factors also need to be taken into account before deciding this.
9. Those following this mechanical asset allocation need to stick to the financial plan regardless of the market conditions.
10. This is because some rebalancing should also take place automatically.
11. So, the equity component will go up in a bull market and this should result in moving a part of your equity assets to debt, and vice versa during the bear market.
12. This method also stops one from being swayed by crowd psychology.
While the rule remains sacrosanct, my view is that young long-term investors should now read it as “110 minus age” – considering longevity, inflation and volatility factors - i.e. they should increase the equity exposure a bit more than the thumb rule in their asset allocation for achieving long-term goals.