You must have heard the rule of thumb: “Your allocation in bonds should equal your age” or “Your equities allocation should equal 100 minus your age.”
Following the above rule of thumb without taking other parameters into consideration will be dead wrong. This simple advice can cause a lot of problems which will not be as simple to fix. The notion that investment is related to or linked to your age, is too generic to be useful for most investors.
“It’s not what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”
The basic theory behind this advice is based on what might be called the life-cycle theory of investing. It is believed that everyone goes through similar and predictable stages in their financial lives. Accumulating more assets instead of saving in early years, saving more in most productive (high earning) years of middle age, and finally spending their savings during retirement.
Do you see the problem with this theory? This theory assumes two things- first that each and every individual of a certain age acts in a similar way, & second that age is a good indicator of your risk profile. Nothing can be far from truth than the above assumptions. Read More