I received a WhatsApp message from a family member who was worried about the downward trajectory of their investments and looking for some advice. Upon probing this family member’s concerns, there were two things I was surprised about. First, why had they not spoken with their financial adviser directly, considering the adviser lives in their same country while I live abroad? And second, why were they so heavily invested in the stock market given their age?

Well, I discovered that the first question was answered by the second question: they didn’t want to contact their financial adviser because they hadn’t taken the adviser’s advice, which was to reduce their equity position. The goal at their age (close to 80) is not to chase returns but to preserve what they have and keep pace with inflation, limiting their exposure to the volatility of the stock market.

Anyone who knows me well would understand that this situation has greatly annoyed me, and I am still irritated by it. Financial advice was given, but financial advice was not taken, or, as I would bluntly put it: “Greed outweighed common sense.” The second of the seven deadly sins came back to bite them.

Beyond this particular situation that I am clearly still reeling over, this reminded me of the days when I worked in the financial planning space and a very common question was frequently asked: “How much should I have in equities?” Too often, people do not understand how investment allocations need to change over time.

One simple, widely cited rule of thumb for determining the appropriate allocation of your investment portfolio between stocks and fixed-income investments (such as bonds) is the “100 minus your age” rule.

This rule suggests that the percentage of your investment portfolio allocated to stocks should be equal to 100 minus your age. The remaining percentage would then be devoted to fixed income investments. For example, a 30-year-old investor would allocate 70 per cent of their portfolio to stocks (100 - 30 = 70) and 30 per cent to fixed income. A 60-year-old investor, on the other hand, would allocate 40 per cent to stocks (100 - 60 = 40) and 60 per cent to fixed-income investments.

The logic behind this rule is rooted in the inherent characteristics of stocks and fixed income investments. Stocks, representing ownership in companies, generally offer the potential for higher returns over the long term. However, they also come with greater volatility and risk. Their value can fluctuate significantly in the short term due to various economic and company-specific factors.

Fixed-income investments, on the other hand, are essentially loans to governments or corporations. These investments are generally considered less risky than stocks and tend to provide more stable returns, albeit typically lower than those of stocks over extended periods.

As you age, your investment time horizon shortens. If you are in your twenties or thirties, you likely have several decades before you need to access your investments for retirement or other long-term goals. This longer time horizon allows you to weather the inevitable ups and downs of the stock market. Even if the market experiences a downturn, you have ample time for it to recover before you need to sell your investments. Therefore, a higher allocation to stocks is generally recommended for younger investors to maximise their potential for long-term growth.

Conversely, as you approach retirement, your investment time horizon shrinks. You will need to start drawing on your investments sooner, making you more vulnerable to short-term market fluctuations. A significant market downturn just before or during retirement could severely impact your financial security. Therefore, a higher allocation to fixed income investments, with their greater stability, is recommended for older investors to preserve their capital and reduce the risk of significant losses.

The “100 minus your age” rule provides a straightforward framework for adjusting your portfolio allocation as you age, shifting from a more aggressive stance with a higher stock allocation to a more conservative approach with a higher fixed-income allocation. This gradual shift aims to balance the pursuit of growth with the need for capital preservation as your financial needs and time horizon change.

However, it is crucial to understand that the “100 minus your age” rule is a simplification and should not be treated as an absolute, one-size-fits-all solution. Several factors can influence your ideal asset allocation, including your individual risk tolerance, financial goals, and overall financial situation.

Risk tolerance is deeply personal. Some individuals are comfortable with greater potential for loss in exchange for the possibility of higher returns, while others prefer a more conservative approach, even if it means lower potential gains. If you have a low risk tolerance, you might consider a slightly lower stock allocation than suggested by the “100 minus your age” rule, regardless of your age. Conversely, if you have a high risk tolerance and a long investment horizon, you might opt for a slightly higher stock allocation.

Your financial goals also play a significant role. If you have specific, shorter-term financial goals, such as saving for a down payment on a house in the next few years, you might need to adopt a more conservative investment strategy for those specific funds, even if your overall portfolio is allocated according to the “100 minus your age” rule.

Furthermore, your overall financial situation, including your income, savings rate, and other assets, can influence your investment strategy. If you have a substantial emergency fund and a stable income, you might be able to take on slightly more risk in your investment portfolio.

The “100 minus your age” rule serves as a useful starting point for thinking about your asset allocation. It provides a simple, intuitive way to understand how your investment strategy should evolve over time. With that said, it is essential to consider your individual circumstances and consult with a financial adviser to create a personalised investment plan that aligns with your specific needs, goals, and risk tolerance. Investing is a journey, not a destination, and a well-thought-out strategy is crucial for navigating the path to long-term financial success.

• Carla Seely has 25 years of experience in the international financial services, wealth management and insurance industries. During her career, she has obtained several investment licenses through the Canadian Securities Institute. She holds the ACSI certification through the Chartered Institute for Securities and Investments (UK), the QAFP designation through FP Canada, and the AINS designation through The Institutes. She also holds a master’s degree in business and management from the University of Essex