Asset Allocation: Rule of Thumb

Many people don’t know that What should be the ideal Asset allocation for their portfolios? Actually Asset allocation in anyone’s portfolio should be according to the age and the risk appetite of the person.

Here is the Rule of Thumb for Asset Allocation -

Equity Allocation = 100 – Your Age. & Rest is Debt & other Asset Classes (Gold, Real Estate…etc…)

Modified Rule of Thumb for Asset Allocation -

Equity Allocation = 120 – Your Age & Rest is Debt & Other Asset Classes

The above 2 are the basic rule of Thumb for Asset Allocation. In fact, whole the theory of Asset allocation revolves around the above 2 Formulas.

According to the first formula, If today your Age is 20 years and you want to start investing than Asset allocation should be 80% Equity (100-20) & Debt Allocation should be 20%.

Some Finance Gurus argue that, at the age of 20, you still have many years to retire and you don’t have any dependents on you so you can allocate 100% in Equity for Maximum profits and that’s why the modified rule of Asset allocation came into exists & that is 120 (instead of 100) minus your age should be the Equity Allocation and rest should be the Debt or any other Asset Class allocation.

Another thing you should keep in mind here that, according to the old financial advises, after retirement (60 years of age), one should not invest in Equity but rather one should transfer their funds into Debt.

But according to the Rule of Thumb, one should continue investing in equity for life long at least in small proportion.