When you create your investment portfolio, one of the most important parameters that will affect your returns is the asset allocation. Meaning, the proportion you invest in different asset classes – equity, debt, gold, and so on. Ideally, you should focus on investing in such a way that your risks are minimized, and returns maximized. But, should this be a factor of your age? Does it make sense to think about asset allocation as per age? Let’s find out.
Should asset allocation change with age?
Yes, absolutely. When you make an investment, you’re looking to buy something that will appreciate in value with time. Each asset behaves differently over time and also accompanies a different level of risk. Your time horizon is an important determinant of risk tolerance – the longer the horizon, the more time you have to ride out the ups and downs of the market. Thus, the higher your risk tolerance. Similarly, a short time frame reduces your risk tolerance levels.
Additionally, one’s risk appetite decreases over time since expenses and financial obligations increase. As investors near retirement, their risk tolerance decreases even further because of the absence of a steady source of income. Thus, it only makes sense to strategize asset allocation as per age.
Additional Read: Investing in different asset classes based on their risk
What is the rule of thumb for asset allocation with age?
Investment in stocks
Stocks or equity shares of a company offer the most potential for long-term wealth creation. However, they are also subject to market changes. Now, when you’re young, your long-term growth potential outweighs the risks involved. It is highly unlikely for young investors to cash out stocks when the market is down. But, as you age, the scenario will gradually reverse. Thus, it is advisable to invest in equities and equity mutual funds when you’re in your prime. With time, decrease your investments in equity and related funds.
Investment in bonds
Bonds or debt-based funds offer lower long-term returns compared to equity. However, they promise a steady stream of income and are ideal for a low risk tolerance level. Therefore, as you near your retirement, your asset allocation as per age should incline more towards fixed-income assets such as debt mutual funds. You can still make investments in this asset class when you’re young, depending on your risk appetite.
Additional Read: Benefit of Asset Allocation in the Portfolio
Thinking about asset allocation according to age
Investors have a handy formula to deduce the right asset allocation as per age. Simply deduct your age from 100 to calculate the percentage of your portfolio that should be invested in stocks. Meaning, a 40-year old would invest 60% of their portfolio in stocks, whereas a 60-year old would invest 40%.
Finally, it’s during your peak-earning years that you should invest the most in stocks and the least in bonds – in your 35s to 50s. Then, as you age, you might want to bring stability to your portfolio with more debt investments and fewer equity ones.
Over to you
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