The Rule of 100 is Broken and So is Your Portfolio

The rule of 100 states that you take the number 100, subtract from it your age, and that is how much of your portfolio should be in stocks.

By that logic a 30-year would have 70% of their portfolio in stocks and 30% in bonds.

This is a very outdated rule, and this article provides a good explanation as to why.

If you do not want to take the time to read it, here is a high-level overview.

• Bond yields were much higher when the rule was made. Following this now when rates are lower will limit you returns.
• Replacements for bonds such as REITs, preferred stocks, and asset backed securities are inherently riskier than bonds. In market down turns they do not help shield portfolios.

Should You Just Increase Your Stock Allocation?

Many pundits believe that the new rule should be based off of 120 and not 100.

This is still wrong.

The only aspects that should drive allocation decisions are your goals and financial plan.

A good financial plan will identify potential weaknesses that inhibit you from reaching your goals.

It will tell you whether you are on pace and how far away you are from reaching them.

It will show whether you are contributing enough to hit those goals and at the right risk level.

Perhaps you are contributing enough but maybe you are taking too little or too much risk. Shifting the allocation of your portfolio can make hitting those goals easier.

It should not be based on your age – it should be based on your tolerance for risk and where you are in relation to your goal.

That’s it. No arbitrary rule to guide you. Just common sense. Just as investing should be.

Questions to Gauge Your Risk Tolerance

What Percent Loss are You Comfortable With?

This is an important question.

Someone who can tolerate a 30% loss in any given year has a larger appetite for risk that someone who can only tolerate 10%.

The higher this tolerance is on an annual basis the more you should consider putting in stocks than bonds.

Clients who tell me they can tolerate up to 30% loss, can have as much as 90% of their portfolio invested in stock.

When Will You Need This Money?

Someone who does not need to access their investments for 20+ years can afford to be more aggressive.

When you have a long runway, you want to maximize return. Being more aggressive can earn you significantly more money.

Investors who need their funds back in less than 2 years need to consider being more conservative. Substantial down swings in the market are not something you would want to be subjected to.

How Fast Do You Plan on Spending This Money?

This is an often-overlooked questions.

The faster you plan on spending down the funds the more conservative you need to be.

Take for example someone paying for their kids’ college and someone just entering retirement.

For college, the money will likely be spent down over 4-5 years. A short runway like that means you want to be more conservative. Poor market performance in the short run can alter your ability to meet your obligations.

On the other hand, if someone plans to spend the money down over a long timeframe – like they do in retirement – they can be more aggressive.

These investors do need to be aware though. As they come closer and closer to depleting the funds, they could take care to gradually become more conservative.

The Market is Down 20%, What Do You Do?

This is my favorite question.

It uses reverse psychology to get inside the mind of my clients.

When a client tells me that they will pull out of the market at this point, it is a signal to me that they are more conservative.

It is also a teaching point. The last thing you want to do when the market is down is abandon your investment plan. You will likely lock in a loss and have to buy back in at a higher point.

Along those lines when an investor tells me they would become more aggressive or add more to their portfolio when the market is down 20%, I know they are more aggressive.

They realize that this is an opportunity to earn a little more because the market is “on sale.”

Similar to how people like to go to the mall on Black Friday and cash in on deals, that is how the market works. When the market is down 20% it is on sale, and risk seeking investors go shopping.

Look at Everything Together

After you answer those four questions reflect on them all together.

In some instances, you might be more conservative, and others, more aggressive.

Let say you answer those questions you they are all conservative answers – you should have no more than 30% of your portfolio in stock.

If all are conservative and one in aggressive, nor more than 45% in stocks.

Those of you split down the middle should consider no more than 60%.

Keeping with this trend if you answer three of the questions aggressively abut 75% of your portfolio should be in stocks.

Finally, if you are aggressive on all fronts, at minimum 90% of your portfolio should be in stocks.

Let Me Help

If you are still a bit confused as to what makes sense for you, I am here to help you make sense.

Click here and fill out the next page and I will reach out to you.

Keeping in the bands above is not hard but determining what makes the most sense for you may warrant further conversation. Getting this right will help you be prepared for your goals, not having to prepare for them at the last minute.

Let me help you by having that conversation with you. I do this hundreds of times each year for my clients and prospects and I am always here to help.

I am also interested to learn how you came up with your own investment allocation.

What factors do you consider when determining how risky you should be with your investments?