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The Rule of 100 Will Help You With Your Asset Allocation

Investing, Personal Finance ·

The Rule of 100 Answers The Question: What Asset Allocation Should I Have?

I overheard a friend of mine say that he was  having difficulty selecting investment options within his 401(k). With such a long time-horizon, he was aware of the aggressive strategy he should have (more stocks than bonds), but he wasn’t sure of the exact allocations. For someone with such a dilemma – uncertain as to what asset allocation they should have – the Rule of 100 is reliable.

Simply put…

The Rule of 100 tells an inexperienced investor what percentage to invest in stocks and what percentage to invest in bonds.

More specifically, the Rule of 100 exemplifies how much risk an investor should take at a specific age.

To simplify the Rule of 100 calculation: You should have your age invested in bonds, and 100 minus your age invested in stocks.

Rule of 100 Example:

Let’s use me as an example.

100

– 26 (age)

= 74% invested in equities

= 26% invested in bonds

A Problem With The Rule of 100

The Rule of 100 assumes every investor of the same age has similar risk tolerances, which is not the case. I have encountered a 25 year-old that cringes at the thought of losing a dollar and an 85 year-old that will (without hesitation) bet half of her net worth on black. We are all different…so tweak accordingly.

A common adjustment to the Rule of 100 is to add 10% to equities if you are a risk taker and subtract 10% from equities if you are risk averse. So if you are a strapping young lad with a white-haired woman trapped inside of you, it’s fine to go 65-35. In the Intelligent Investor, Benjamin Graham warns never to go outside of 75-25.

A Question About The Rule of 100

  • But what if you have 40 years until retirement and historically stocks will outperform bonds? Wouldn’t it make more sense to be 100% equities?
  • But haven’t bonds actually outperformed stocks over the past 30 years? Wouldn’t it make more sense to put 100% in a “less-risky” investment that yields higher returns?

Both of these questions are correct. Over the long-term, stocks have seen the highest gains among traditional investments. Also, according to Bloomberg, over the last 30 years (which is a pretty long-term, no?) long-term government bonds have gained 11.5% a year beating the 10.8% increase in the S&P 500. Even so, it would be a great risk to allocate 100% of your portfolio to either investment.

What do you all think of the Rule of 100? Is it useful? Is it completely wrong?

A Blinkin

Hunter, aka A. Blinkin, is the blogger behind Funancials. His experience in banking, lending, payments and investments has earned him the title of "Personal Finance Guru." In addition to helping people with their finances, Hunter enjoys crunchy tacos, open mouth kisses from his 2 baby boys and writing in third person.

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I'm a big believer in transparency. As such, you should know that I make money from this blog. Weird, I know. The way I make money is simple: I occasionally link to products and companies that I believe provide tremendous value. If you choose to sign up, I may receive a small payout. This payout comes at no additional cost to you and, trust me, it's small. I'm in no position to quit my day job. Please do not spend any money on these products unless you feel you need them or that they will help you achieve your goals.

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  2. […] I’ve talked a bit about how I don’t understand investing. I’m lucky enough that my 403(b) has those targeted retirement funds, where they automatically adjust what you’re investing in based on how close you are to retirement. But if you don’t have that option, or you want a little more control over your investments, Funancials does a great job of describing the Rule of 100. […]

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