Retirement
How to apply the 100-year investment rule
The 100-year investment rule is a very common sense approach to asset allocation over an individual’s life cycle, a portfolio manager has said.
How to apply the 100-year investment rule
The 100-year investment rule is a very common sense approach to asset allocation over an individual’s life cycle, a portfolio manager has said.
In conversation with nestegg, the portfolio manager and research analyst at Clime Investments, Dr Vincent Chin, explained that working back from an initial figure of 100 “makes perfect sense” for investors trying to decide how to best allocate investments.
Your age, turned into a percentage, becomes the amount of defensive assets that should form part of a portfolio, while the remainder, also turned into a percentage, becomes the allocation of growth assets.
Despite being apprehensive to call it a rule, instead offering it as an investment “guideline”, Dr Chin explained that “when you are younger, you should be into more growth assets” as that’s the way you can accumulate your assets.
“When you get older, you should be [leaning] towards more defensive assets,” he continued, because the time frame of investment of those assets is getting shorter and shorter.
Dr Chin said the reason for the starting figure is that “very few people will reach the age of 100”.
Calling the future “unknown and unpredictable”, Dr Chin said as someone gets older, they typically want to be more on the safe side and bring down their risk profile.
“If you are 20, theoretically you should have at least 80 per cent in equity or growth assets,” he said.
Following the guidance, “if a person is 50 years old, you should have 50 per cent in income defensive assets, and 50 per cent in growth assets”.
For 60-year-olds, the rule should see someone switch over to a higher proportion of defensive assets and “maybe only 40 per cent in growth assets”.
“It makes perfect sense, because when you get to 85, all you need is 15 per cent of growth assets and the bulk of it should be in income assets because you need the money to live on,” Dr Chin continued.
For those who worry about outliving what they have and would like to be more conservative, Dr Chin offered up an increased starting figure of 110 years.
Basically, “the chances of someone living to 110 is much lower than someone living to 100 years”, the portfolio manager said.
Risk tolerance is key
Despite the simplicity of the common sense guideline, Dr Chin emphasised the importance of an individual considering and understanding their own tolerance of risk.
“Even despite what I said about the 100 years, there are people in their 70s and 80s that like to take a lot of risk,” he explained.
Similarly, if a 25-year-old or 35-year-old is very risk-averse, then they shouldn’t be following the 100-year guideline, “so you then have to look at it in terms of return risk correlation”, the analyst said.
In parting, Dr Chin offered the reminder that “investing is about the future and is very unpredictable”.
“You really need to know your risk tolerance,” he reiterated.
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