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What is the Rule of 100?
The Rule of 100 is an investment guideline that helps determine the ideal mix of stocks and bonds in a portfolio by subtracting an investor’s age from 100 to find their recommended equity exposure.
Key takeaway: The Rule of 100 adjusts portfolio risk with age, encouraging higher equity exposure for younger investors and more conservative allocations for older ones.
Definition
The Rule of 100 is a simple formula for asset allocation that suggests the percentage of a portfolio invested in stocks should equal 100 minus the investor’s age.
Why It Matters
As investors age, their ability to recover from market downturns decreases. The Rule of 100 offers an intuitive way to reduce risk gradually while preserving growth potential and income security through balanced diversification.
Key Features
- Balances growth and risk by age.
- Simplifies asset allocation decisions.
- Encourages diversification between equities and fixed income.
- Adaptable to individual risk tolerance and retirement goals.
- Commonly used in retirement and wealth management planning.
How It Works
- Subtract Age from 100: 100 − age = % in stocks.
- Allocate Remaining to Bonds: The balance goes into bonds or fixed income.
- Reassess Periodically: Adjust allocation as you age.
- Adapt for Risk Profile: Conservative investors may reduce stock exposure faster.
- Example: A 40-year-old → 100 − 40 = 60% in stocks, 40% in bonds.
Types
- Traditional Rule of 100: Basic age-based allocation.
- Rule of 110/120: Updated variations reflecting longer life expectancy.
- Customized Rule: Adjusted for income stability, time horizon, and goals.
Comparison Table
| Feature or Aspect | Rule of 100 | Rule of 120 |
|---|---|---|
| Equity Allocation Formula | 100 − age | 120 − age |
| Risk Level | Moderate | Higher |
| Target Audience | Traditional investors | Younger or more aggressive investors |
| Longevity Adjustment | None | Yes |
Examples
- Example 1: A 30-year-old investor holds 70% equities and 30% bonds.
- Example 2: A 55-year-old allocates 45% to stocks, 55% to fixed income.
- Example 3: A retiree adapts the rule to 110 for longer retirement planning.
Benefits and Challenges
Benefits
- Easy-to-apply investment guideline.
- Reduces risk exposure over time.
- Aligns allocation with life stage and goals.
- Provides a baseline for financial planning.
Challenges
- Doesn’t account for individual circumstances.
- Ignores income, assets, and risk tolerance variations.
- Too simplistic for complex portfolios.
Related Concepts
- Asset Allocation: Distribution of assets among investment classes.
- Risk Tolerance: An investor’s ability to handle market volatility.
- Modern Portfolio Theory (MPT): Framework optimizing returns for given risk levels.
FAQ
Why subtract age from 100?
The logic assumes that as you age, you should hold fewer risky assets to protect your portfolio from volatility.
Is the Rule of 100 outdated?
Some advisors prefer the Rule of 110 or 120 to reflect longer lifespans and lower interest rates.
Can it apply to all investors?
It’s a guideline, not a rule — professional advice should tailor allocations to personal goals.
How often should investors adjust their portfolio?
Typically once a year or when there’s a major life or financial change.
Sources and Further Reading
- Vanguard: Asset Allocation by Age and Risk Profile
- Morningstar: Investment Portfolio Design
- Investopedia: https://www.investopedia.com/terms/r/rule-of-100.asp
Quick Reference
- Equity Exposure: Percentage of portfolio in stocks.
- Fixed Income: Bonds or interest-bearing assets.
- Rebalancing: Adjusting allocations over time.
