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Beware of using the ‘100 minus age’ thumb rule for equity allocation

One major problem with this rule is that it simply assumes that age alone decides a person’s asset allocation

December 17, 2020 / 10:14 AM IST

I am sure many of you would have heard of this rule. The ‘100 minus age’ is a common thumb rule to decide one’s asset allocation. It’s generally used for retirement, but is often misused by many.

We will get to why it’s not right to use this rule all the time. But before that, if you don’t know about this rule, then here is a short refresher.

The rule says that you subtract your age from 100 to arrive at the ideal asset allocation for your investments. So, if you are 30, then 100-30 would give 70, which is the percentage of equity you can have in your portfolio. That is, you have Equity:Debt in 70:30 ratio. For someone who is 45, the rule will suggest 55 percent (= 100 - age 45) as the equity allocation.

Put simply, the rule aims at reducing the equity allocation for older investors. That is the main message of this rule. And it’s a well-intentioned thumb rule. But that is what it is – just a rule of thumb or a kind of broad generalization.

Taking age alone into consideration


One major problem with this rule is that it simply assumes that age alone decides a person’s asset allocation. And that is not true. Factors such as investor’s risk appetite, goal’s timelines and return requirements are the major factors that decide asset allocation as well.

Age cannot be the sole factor in deciding the allocation. Take a simple example. Let’s suppose there are two friends, both aged 35. Now the ‘100 minus age’ rule says that both should have 65 percent in equity. But there may be a vast difference in the profiles and situations of the two.

The first person has a flourishing business, a working wife and a school-going kid. On the other hand, the second person is salaried, has a housewife, two school-going kids, dependent parents, one of whom is scheduled to have a costly uninsured surgery very soon. And to top it all, he also has running home and car loans.

Pretty different circumstances for both, you will agree!

It is evident that where the first person can have 65 percent in equity, the other one cannot have so much equity, given his near-term financial obligations. If he invests a lot in equity and markets go down, it will be a sad situation for him as he needs a lot of money in the short term.

And this is the problem with this thumb rule of 100 minus age. It gives no weightage at all to an investor’s unique circumstances.

Is there a better way to plan?

A more practical alternative is to focus on goals and accordingly decide your asset allocation.

The best part of this strategy is its simplicity. Depending on your risk profile and goal’s investment horizon, this strategy tells you how much to invest and in what asset allocation for each of the financial goals. For example: Suppose you have three goals with time horizons of three years, eight years and 18 years. Now, if you are a moderately aggressive 35-year old investor, other things being the same, you can have different allocations for different goals. So, the three-year goal can have 100 percent in debt. The eight-year goal can have 50:50 in equity and debt, while the 18-year goal can have 75:25 in Equity:Debt. This is a far cry from having 65 percent in equity, mandated by the ‘100 minus age’ rule for a 35-year-old.

Given the complexity of investment options available, many times, people gravitate towards such thumb rules. But as I have written about this earlier too, following arbitrary thumb rules can end up derailing your financial goals. All rules of thumb are mere approximations. In particular, this rule of ‘100 minus age’ assumes that asset allocation is the same for everybody in a given age group. You can have a look at such thumb rules. But eventually, it is best to decide your allocation in line with your goal timelines and risk profile.
Dev Ashish The writer is the founder of
first published: Dec 17, 2020 10:14 am
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