While opting for any investment strategy, it is better to spread the money into different types of asset classes, such as stocks, bonds, mutual funds, gold, and real estate, among others.
This diversification aids in reducing the overall risk of losing all money in case one investment falls short of expectations in terms of performance. In this regard, the 100-minus age rule can help an investor diversify their portfolio.
The 100-minus age rule is an ideal way to determine asset allocation for any investor. This means how much an investor should allocate in equities and how much in debt and other asset classes.
To arrive at this, an investor is required to subtract their age from 100, and the number that one arrives at is the percentage at which they are required to invest in equities. The rest can be diverted to other asset classes like debt, gold, or other investment avenues.
For instance, consider an investor who is 30 years old and wants to invest Rs 20,000 on a monthly basis. With the use of the 100-minus age rule, the percentage of the equity allocation would be 100–30=70%. This way, Rs 14,000 should be allocated towards equities and Rs 6,000 in debt.
For any investor, diversifying investments across various asset classes can easily reduce the risk in the overall portfolio, considering the performance of a portfolio is not dependent on just one asset class. Besides, spreading investments across different assets prevents over-exposure to any single asset, reducing the potential negative impact of an underperforming investment.
Moreover, one can expect to earn better risk-adjusted returns in case they allocate assets according to their financial goals and risk appetite.
Also, asset allocation strategies aid an investor in achieving their financial goals as they spread their investments across different types of assets, considering their risk-taking ability.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.