Equity Investments: A Balanced Portfolio For Older Investors

When it comes to investing, a person's age plays a crucial role in determining their risk tolerance and the types of investments that are suitable for them. For a 62-year-old individual, the traditional advice has been to reduce their exposure to risky assets like equities and allocate a larger portion of their portfolio to fixed-income investments such as bonds. The commonly cited 100 minus age rule suggests that a 60-year-old should hold 40% of their portfolio in equities. However, with increasing life expectancies and low yields on fixed-income investments, some experts argue that this rule may need to be adjusted to 110 minus age or even 120 minus age. This means that a 62-year-old, according to the adjusted rule, could invest between 48% and 58% of their portfolio in equities. It's important to note that every individual's situation is unique, and factors such as risk tolerance, retirement goals, and other sources of income should also be considered when determining the appropriate asset allocation.

The '100 rule'

The "100 rule" is a commonly cited rule of thumb for simplifying asset allocation. According to this principle, individuals should hold a percentage of stocks equal to 100 minus their age. So, for a 62-year-old, this rule suggests that 38% of their portfolio should be equities, with the rest comprising safer assets such as high-grade bonds and government debt.

This rule is based on the idea that investors should gradually reduce their risk as they get older. As retirees do not have the luxury of time or capital to wait for the market to recover after a dip, it is important to lower the amount of risk in your portfolio as you age.

However, it is important to note that this rule is just a guideline and there are other factors to consider when determining your investment strategy. For example, people are now living longer, which means that this rule may need to be adjusted to 110 or 120 minus your age to account for longer retirement periods. Additionally, factors such as an investor's risk appetite, timelines, and return requirements should also be considered when determining asset allocation.

It is also important to consult a financial professional when undertaking any investment strategy and before making any investment decisions. They will be able to help you determine an investment strategy that takes into account your individual circumstances and goals.

• What is my risk tolerance on a scale of 1-10?
• If my portfolio dropped 50% in one year, will I be financially OK?
• How stable is my primary income source?
• How many income streams do I have?
• Do I have alternative ways to make income?
• What is my knowledge about stocks and bonds?
• How long is my investment horizon?
• Where do I get my investment advice and what is the quality of that advice?

By answering these questions and considering your individual circumstances, you can determine an asset allocation that is appropriate for your needs and risk tolerance.

The '110 rule'

The 110 rule is a guideline for equity exposure based on your age. To use the rule, subtract your age from 110. The answer is the percentage of stocks or stock funds to hold in your retirement account. For example, a 60-year-old following the 110 rule would hold 50% of stocks or stock funds.

The rule is designed to give you access to higher growth rates when you're young and to put you into a more defensive stance as you near retirement. The rule has evolved from the 100 rule, which suggested more conservative asset allocations. For example, the 100 rule would recommend a 35-year-old hold 65% in stocks, while the 110 rule recommends 75%.

The change in the rule reflects the fact that people are living longer and that many fixed-income investments offer lower yields. The 110 rule is designed to help investors build the retirement wealth they need without risking too much.

However, it's important to note that the rule does not address the emotional aspect of investing. It's up to you to decide how to balance stocks, bonds, and cash in your retirement account, taking into account your own risk tolerance. If you can tolerate a higher level of risk, you may want to modify the rule to 120 minus your age.

It's also worth noting that the 110 rule is just a starting point for making investment decisions. There are other factors to consider, such as your retirement age and the assets needed to sustain your lifestyle. Consulting a financial professional is recommended when undertaking any investment strategy.

The '120 rule'

The 120 rule is a guideline for investing that encourages investors to stay in the stock market longer to build more wealth. The rule states that investors should subtract their age from 120 and use the result as the percentage of their investment dollars in stocks and other equity investments. The remaining amount should be invested in low-risk assets such as certificates of deposit (CDs), bonds, Treasury bills, and fixed annuities.

For example, if an investor is 30 years old, they would invest 90% of their retirement money in stocks and 10% in more stable financial instruments. This creates a portfolio that gradually carries less risk as the investor ages. On the other hand, a 75-year-old would have 45% of their portfolio in stocks and the rest in other assets, reflecting a more balanced approach as they are likely retired and seeking to stabilize their income.

The 120 rule is a modification of the older 100-age investment rule, which used 100 instead of 120 for subtraction. The old rule led to a quicker shift to low-risk, low-yield assets, reducing overall gains. Additionally, with modern medicine elongating lifespans, the 100-age rule created overly conservative portfolios that could not support retirees in their old age. The 120 rule aims to address these issues by keeping portfolios aggressive for longer, giving investors a better chance of generating sufficient retirement income.

It is important to note that the 120 rule is not a guarantee of sufficient retirement income but rather a guideline to help investors maximize their portfolio's potential. The rule takes into account longer lifespans and the need to stay ahead of inflation. While low-risk assets provide stability, diversifying into riskier assets can increase income potential. However, it is crucial to consider individual circumstances and risk tolerance before implementing an aggressive investment strategy.

Risk tolerance

Age plays a significant role in risk tolerance. Generally, younger investors can tolerate more risk than older individuals. This is because they have a longer time horizon to recover from potential losses. As people approach retirement, their risk tolerance decreases, and they shift their focus from growth to income stability.

Financial circumstances also impact risk tolerance. Individuals with higher incomes and more robust emergency funds may feel more comfortable taking on risk. In contrast, those with limited financial resources and near retirement might opt for more conservative investments.

Personality traits and investment behaviour contribute to risk tolerance as well. Some individuals are inherently more risk-averse, while others are comfortable with aggressive investment strategies. It is essential to assess one's comfort level with market volatility and the potential for losses.

When determining an investment strategy, it is crucial to consider both age and risk tolerance. While conventional wisdom suggests reducing equity exposure as one gets older, this may need to be adjusted based on individual circumstances. For example, a 62-year-old with a high-risk tolerance and a long investment horizon may opt for a more aggressive allocation.

It is worth noting that risk tolerance is not static and can change over time due to various factors, such as changes in financial circumstances, market conditions, or personal risk appetite. Therefore, it is essential to periodically review and adjust one's investment strategy to align with their current risk tolerance and financial goals.

Retirement age

Asset Allocation:

The traditional rule of thumb for asset allocation has been the "100 Rule", suggesting that one should subtract their age from 100 to determine the percentage of their portfolio to keep in stocks. For example, a 60-year-old would have 40% of their portfolio in stocks. However, with increasing life expectancies, some experts now recommend the "110 Rule" or even the "120 Rule", which accounts for longer lifespans and the need for greater growth.

Risk Tolerance:

It's important to consider your risk tolerance when deciding on an asset allocation strategy. If you are 65 or older and have a high risk tolerance, you may opt for a more stock-heavy portfolio. Conversely, if you are younger but averse to risk, a 50/50 split between stocks and bonds may be more suitable.

Diversification:

Diversification across asset classes, such as stocks, bonds, cash, and alternative investments, is crucial. Within these asset classes, further diversification can be beneficial. For example, holding 20 or more individual stocks or investing in mutual funds or exchange-traded funds (ETFs) can provide diversification within the stock asset class.

Emergency Funds and Short-Term Needs:

It is recommended to keep any money you'll need within the next five years in cash or investment-grade bonds. This ensures that you have liquidity and stability for short-term needs and emergencies.

Professional Advice:

Retirement planning can be complex, and it's essential to consider your unique circumstances. Consulting a financial professional can help you make informed decisions about your asset allocation, risk tolerance, and overall retirement strategy.

Other Considerations:

• Taxable Accounts: In addition to tax-advantaged retirement accounts, consider saving in a taxable account to provide flexibility and improve tax diversification.
• Social Security and Pensions: Include expected Social Security benefits and any pensions in your retirement plan. These can impact your overall income and influence your investment decisions.
• Required Minimum Distributions (RMDs): Be mindful of RMDs from retirement accounts once you reach a certain age. Failing to take RMDs on time can result in penalties.
• Health and Longevity: Your health and expected lifespan can influence your retirement planning. If you plan to live longer than the average lifespan, you may need to adjust your asset allocation and savings rate accordingly.

In conclusion, retirement age investing requires a careful assessment of your goals, risk tolerance, and unique circumstances. Diversification, a consideration of your time horizon, and seeking professional advice are key aspects of a successful retirement investment strategy.

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