Asset allocation is one of the more basic investment concepts that is most often neglected.
The concept behind it is quite simple: the percentage or allocation of your assets between bonds, equities, and the like should change as your life stage does too. Your investment horizon, your need for liquidity, and your capacity to take risks will then change as you grow older.
“As you go through life’s different stages, your financial needs change,” agrees Alvin T. Tabanag, personal money management coach, registered financial planner, and best-selling author of ’12 Steps to Build Wealth on Any Income.’ “In your 20s and 30s you will mostly be concerned with addressing needs related to starting and building a family: a wedding fund, building your own home, stuff for the house, a new car, and your children’s college education fund. As you enter the mid-life stage, focus shifts to more long-term needs.”
The “100 Minus Age” Formula
So how does one know how much of each asset to have?
One of the most simple rules used is the “100 minus age” formula. In it, one simply subtracts their age from 100 to determine what percentage of their investment allocation should go to stocks or equities.
So, for example, someone who is 30 years old should have 70% (100 – 30 = 70) of his investments in high-risk, high-yield investments such as stocks. Similarly, someone who is 60 years old should have no more than 40% (100 – 60 = 40) of his assets exposed to the volatility of equity investments.
However, with the improvements in medical technology and the increase in life expectancy, the ‘100 Minus Age’ formula has come under some scrutiny. As more people reach their 80s and 90s, the need for their finances and investments to continue passively working into their 70s becomes more important.
Thus, financial advisors have been looking at a more progressive (and slightly more aggressive) asset allocation strategy.
Those in their 30s are often in the middle of raising young families. They have one or two children in grade school, or are single professionals who are deeper into their careers as middle managers, senior managers, or junior executives.
People at this life stage are knee-deep in generating active income, and have a relatively longer investment horizon. Thus, investors in this life stage have a larger capacity for equity investments. However, people in this life stage are also usually building assets through leverage such as a car or a house, and with hefty expenses such as school tuition fees.
Real Estate across Life Stages
What’s interesting to note is that real estate investment is a key asset that should always be present regardless of life stage. Property investments–specifically, buying property in the Philippines and investing in condominiums for sale–are always a good idea as they steadily increase in value over time. They can also be a source of both active and passive income when managed properly.
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