Asset Allocation with age
- February 6, 2022
- Posted by: MvM Team
- Categories: Investing, Personal Finance
Asset Allocation
Like a balanced diet focuses on the right mix of nutrients required for your appetite, an asset allocation consists of the right mix of different asset classes for your risk appetite.
Why is it necessary to allocate your assets?
These allocations are proportionate to the stage of life you are in. Many investors don’t consider risks and returns. Hence, they end up having portfolios that are heavily skewed and irrational towards particular asset classes.
Here are the asset classes and requirements they fulfill in a portfolio:
Asset Class | Features in a portfolio |
Cash | High liquidity, prone to inflation |
Bonds/ Fixed Income | Safe income, mediocre returns |
Equity | High growth |
Gold/ Commodity | To hedge risks |
Real Estate | Immune to inflation but low liquidity |
Virtual Assets | Novel investment avenue, extremely high risk and volatility |
Though the investment decision varies for every individual and their financial goals and needs, here are some general suggestions that you can consider before allocating your assets. The segment divides basic asset classes according to your age:
Age | 20s | 30s | 40s | 50s | 60s - 70s |
Risk Tolerance | Very high | High | Medium | Low | Very low |
Approach towards risk | Aggressive; 80% equity & 20% bonds | Can afford risk; 70% equity & 30% bonds | Moderate; 60% equity & 40% bonds | Safe; 40% equity & 60% bonds | Can’t afford risk; 25% equity & 75% bonds |
Features | Time availability with better compounded returns | Income stability | Peak earning potential but not enough time to take risks | Less miscellaneous expense and more health expenses | Collect retirement benefits and keep a steady portfolio |
Financial goal | To invest long term, create emergency funds, pay debts, and avoid slow-growing assets | Retirement and health contribution are priority | To invest in inflation-beating assets | Have 3-6-month emergency funds, switch to stable low earning funds in money markets | Safeguard the corpus received and focus on consolidating investments |
To understand the allocation better, you can apply a classic thumb rule. Subtract your age from 100. Invest the difference as a percent of your savings into equities and the rest percentage in bonds.
For example, Raman’s age is 25. He saves Rs 30,000 every month. According to the thumb rule, he should invest 75%, i.e. Rs. 22.5k, of his savings to equity/ stocks and 7.5k into bonds.
