I’m often asked how someone should adjust the amount they allocate to stocks and bonds within their portfolio as they move through different stages of life. Below are the most common questions I hear from clients on asset mix:
Q: I’ve heard the “100 minus your age” rule to determine my bond weighting. Should I use it?
A: It’s a decent starting point, but not the full picture. This rule suggests that if you’re 40 years old, you should hold 40% bonds and 60% in stocks. And every year, gradually add to your bond weighting to match your age, while reducing your weighting to stocks. The idea is that as you age, you reduce risk because you have less time to recover from losses. But life is rarely that simple.
Q: Does age really matter when determining asset mix?
A: Yes, but indirectly. Theoretically, when you retire, your ability to recover from losses goes down since you’re no longer have the ability to add new income. Your need to take risk may also fall if your pensions and savings cover essential expenses.
However, retirement isn’t necessarily the stage of life when you should take the least risk. Your liabilities in mid-career, when you may have a big mortgage, your own business, kids, or high fixed costs, could make you less willing to take high investment market risk,
Q: What’s the best way to decide on my asset mix?
A: If you’ve ever heard me talk about asset mix, you know I’m going to recommend looking at three components together:
Ability: your financial capacity to take risk (income, savings, flexibility).
Need: the growth required to reach your goals.
Willingness: your emotional comfort level with market volatility.
Ideally, all three align. But when they don’t, the component that should guide your portfolio is usually the one most connected to your top priority. You should assess these components regularly, at least every 2-3 years.
Q: What happens when the three components point in different directions?
A: This is common. For example:
Someone with a large portfolio that has been projected to fund their retirement lifestyle and fulfill their legacy goals has a high ability to take risk, but they’ve lived through multiple recessions which has lowered their willingness to take risk.
A younger person just starting to build their portfolio might have a high need to take risk because of significant financial goals, but have a low willingness to take risk because of their lack of financial literacy.
Neither component is right or wrong to focus on. As in the previous answer, it depends on which matters most to you.
Q: How do I know if my asset mix is too risky?
A: Always “stress-test” your plan. Ask, if the markets dropped 20%-30% this year:
How would my financial goals be affected?
Would I still sleep at night, or would I panic and sell at the wrong time?
The danger isn’t the market declining. It’s abandoning your strategy midstream or needing to withdraw a significant amount from your portfolio before it can recover. A portfolio strategy only works if you can stick with it.
Sometimes, thinking in terms of dollar declines as opposed to percentage declines might add perspective. You might think you can tolerate a 10% drop in your portfolio. But if your portfolio is, say, $500,000, how would you feel if you had $50,000 less when you checked your portfolio statement next quarter?
Final Thought
Age matters when it comes to asset allocation, but it shouldn’t be the only driver. The best asset mix balances your ability, need, and willingness to take risk. Sometimes that points toward caution. Other times, especially when your essential obligations are secure, it may allow more risk in pursuit of higher returns or legacy goals.
The right mix is the one that supports your most important goals, not someone else’s.
On a personal (and business ) note…
I mentioned in a previous newsletter, I recently celebrated the second anniversary of Eltero Financial Partners and offering fee-only, advice-only financial planning. Here is a link to an article release in the Globe & Mail noting my anniversary.
I wouldn’t blame you if terms like “fee-only”, “advice-only” and “fee-based” advisors are confusing. They are to me sometimes, too. If so, you might find my recent website blog helps clarify these terms: Link here.
David
P.S. Feel free to ask questions or leave comments. I’ll be happy to respond.
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