In the la-la land of myths and mysteries surrounding investing, the “Rule of 100” sits somewhere near the very top. Discuss asset allocation even casually with investors, and this imaginary theory rears its head all of a sudden. Its staunchest adherents concede that it is tragically flawed — and, yes, it certainly does not merit a universal underpinning. In this article, we will not only argue against the so-called Rule of 100, but also we will discuss superior alternatives.
For starters, we will ask you to imagine a middle-aged man in an urban setting, investing for self and family, trying to juggle his EMIs, parents’ medical bills and a school-going child’s tuition fees.
Let’s assume he is a 40-year old householder. The Rule of 100 urges us to subtract an individual’s age from hundred and allocate the sum so derived (as a percentage of his total investments) to equities. Our 40-year old, therefore, will be advised to invest 60 per cent of his surplus in the stock exchange. And, as he grows older, the equity component of his portfolio (that is, the riskier part) will get reduced. Debt, the less risky component in conventional terms, will automatically increase as the individual ages.
A confession at this stage will be in order. The topic came up during a meeting with a new acquaintance, which has actually set the tone for today. It began with a straight question — is the “Rule of 100” a fable or does it really hold a deeper meaning? More than a mere fable, it is a fallacy, we told him. Here’s why.
Let us at this stage think of two scenarios one after the other. In the first is a 25-year old investor who has already experienced a crash. He looks around and finds out about layoffs and benching — these sights do not give him confidence. Or he is not advised properly by a professional. His instincts tell him not to go long on equities — and he actually does not. Instead, he tries to achieve what he thinks balances between the “right” and the “wrong” asset classes.
The second scenario has a 65 year-old (yes, he has retired quite a while ago) who is very well ensconced financially. No significant worries, nomination and such other nuts and bolts are sorted. He knows he can take risk even at his age — he even enjoys the idea of investing in newly-emerged asset classes. Gold and silver are well on his radar. So are fresh techniques such as ETFs. He spreads his wealth thinly across the investment space.
The two profiles are very realistic, and we come across such cases every now and then.
The contemporary world has thrown up a diverse range of investors. Not everyone retires at the “normal” time, plenty of people do so in their 50s these days. Career paths are not as linear as they were even 15-20 years ago. A mid-career start-up founder (with uncertain income and zero pension) will have a very special risk profile. A government servant in the same age bracket will have a drastically different world view. How can the same mantra apply equally to both individuals?
Solutions
The trick is to take cognisance of one’s own risk profile at all times. The efficient allocator will also consider the entire gamut of asset classes before he exercises his choices. There is, for instance, real estate. How much weight should be assigned to it? What are the investor’s views on its prospects? How much rental income or capital gains does he expect from property? These are typical questions.
Keeping all asset classes in mind, here are some important points to remember.
The Rule of 100 is too outdated to be even considered in the modern world. It was, by some stretch of imagination, relevant when things were way different. Careers were stable, the gig economy was merely marginal. Debt securities yielded more, investing in bond was much sensible. The average lifespan was shorter; it is about 70 years or so in India now). Moreover, asset classes were fewer, and allocators did not have too many choices on the table. It is not so any more. Time for the myth to get busted.
Nilanjan Dey is partner, Wishlist Capital (ARN-84929)
