Business & Investment

Invest: How Much Should You Invest in Stocks? Don’t look at your age!

Traditionally, age has played an important role in stock allocation. The widely adopted rule of thumb “100-age” is Equity.. According to this rule of thumb, capital allocation is calculated by subtracting age from the number 100. For example, if you are 30 years old, according to this rule of thumb, your capital allocation will be 70% (100-30). ). The main assumption here is that as you grow older, your willingness and ability to absorb risk diminishes. You need to reduce your equity exposure accordingly. However, this assumption is flawed. Age cannot simply be the only determinant of your stock allocation.

For example, consider two Ram and Shyam, both 45 years old. Currently, Lamb has a stable, well-paid job, a small amount of unpaid mortgages, and minimal debt. He is not married Meanwhile, Siam is married to two children, 15 and 12 years old. He has a stable and well-paid job, but he also has excellent mortgages and car loans. According to the “100 years old” rule, both Ram and Siam must allocate 55% of their portfolio to shares. But that doesn’t sound right. Siam has a family with more responsibility and care, so his ability and willingness to absorb risk is lower than that of Lamb. Therefore, the 55% allocation to Shyam can be too high. On the other hand, Lamb’s debt is minimal, so the 55% allocation to stock may be too low.

Omaha’s Oracle was saying something interesting about this. In the 2013 letter Berkshire Hathaway Shareholders, Warren Buffett share investment A plan for his wife that not only contradicts the “100 years old” rule, but also goes against the advice of most retirees. He writes that after his death, his wife’s inheritance trustee was instructed to invest 90% of her money in a stock index fund and 10% in short-term government bonds. Most investors are advised to reduce their equity exposure as they get older, but the wisest of all gave the opposite advice. Obviously, the most important thing to understand is that there are several other factors involved in stock allocation. Includes two main ones:

Risk profile

As a retail investor, you have a unique risk profile that captures your willingness and ability to take risks. In this case, motivation is a more psychological factor, implying how comfortable you are at taking risks. On the other hand, the ability to take risks is easy to measure. It takes into account your current and expected future income, your current and expected future debt, and your assets. People with large investment or asset bases and limited debt are undoubtedly in a better position to tolerate risks than those with low investment or high debt.

Investment period

It is well known that equity is a long-term means of generating wealth. Therefore, as an investor, if you have many goals set in the next two to five years, large equity allocations may not be appropriate, regardless of age or risk profile. On the other hand, if most of the goals are long-term in nature and start to rise after 5-7 years, more stock allocations may be needed. However, this should be consistent with the overall risk profile.

There are two sides to age. One is your chronological age and the other is your biological age. You should not let your chronological age determine how you live your life. Similarly, you should not let it determine how much you invest in stocks.

(The author is the executive director of IIFL Wealth. The views are his own.)

Invest: How Much Should You Invest in Stocks? Don’t look at your age! Invest: How Much Should You Invest in Stocks? Don’t look at your age!

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