The fundamental idea behind age-based asset allocation is that as you get older, your exposure to investing risk must come down. Since these investments have a larger risk but provide higher return, it is sometimes referred to as the proportion of equity/stocks in your portfolio.
Example: Suppose your age is 40 then, 100 – 40 = 60.
Equity = 60%
Debt = 40%
100-Age Rule – Let’s understand this with a simple story.
On a warm Sunday evening, Amit, a 23-year-old who had just landed his first job, sat on the balcony with his father, sipping chai. Looking at the sunset, Amit sighed, “father, now that I’m earning, I would like to invest, but I have no idea how and where to start.”
Father smiled. “Beta, let me teach you a simple finance rule—The 100-Age Rule. It will help you decide how much to invest in stocks and how much to keep safe.”
Amit raised an eyebrow. “100-Age Rule? What is that?”
Papa took out a pen and wrote on a notepad:
100 – Age = Percentage of money to invest in stocks
“For example, you are 23 now. If we do 100 – 23 = 77, it means 77% of your investments should be in stocks or equity for high growth, and the remaining 23% should be in safer assets like bonds, fixed deposits or debt.”
Amit’s eyes lit up. “Oh! So, as I get older, I should reduce my risk?”
Father nodded. “Exactly! When you are young, you can take more risks because you have time to recover from market fluctuations. But as you grow older, you need to protect your wealth.”
Amit thought for a moment. “So, your age is 55, which means you should have 100 – 55 = 45% in stocks and the rest in safer investments like debt etc.?”
Father laughed, “Yes! You’re already getting smarter. This rule helps maintain a balance— between high growth when you’re young and stability when you are older.”
Amit smiled. “Got it, Father! From today, I’ll follow the 100-Age Rule and start investing wisely.”
Father patted his back. “That’s my boy! The sooner you start, the wealthier your future will be.”
And with that, Amit took his first step towards smart investing journey, under the guidance of his father.