100-minus-age rule - 2025-02-27

The "100-minus-your-age" rule, a seemingly simple guide to asset allocation, has misled countless investors. It suggests that your stock percentage should decrease as you age, favoring bonds and other "safer" investments. However, this simplistic formula overlooks crucial factors and can lead to significant missed opportunities.

Let's dissect why this rule is fundamentally flawed:

1. The "Good Company" Paradox:

Imagine you've diligently researched and invested in a company with a proven track record, strong fundamentals, and promising growth potential. According to the 100-minus-age rule, you'd be compelled to gradually sell off these shares as you approach retirement. But why? If the company remains strong, why abandon a winning strategy? The only logical reason to reduce your holdings is if you doubt the company's long-term prospects or if you need to protect your gains from excessive risk. This rule assumes all companies are equal and that age alone dictates risk tolerance, which is simply not true.

2. The Buffett/Munger Counterexample:

Consider the investment philosophies of Warren Buffett and Charlie Munger. They've built their fortunes on long-term investments in exceptional companies. If they had adhered to the 100-minus-age rule, their wealth would be a fraction of what it is today. They understand the power of compounding and the potential for long-term growth in quality equities. They understand that time in the market, not timing the market is the key.

The Real Dangers of This Misleading Rule:

  • Undermining Long-Term Growth: By prematurely shifting to conservative investments, you sacrifice the potential for substantial wealth accumulation, especially during periods of inflation.
  • Ignoring Individual Circumstances: The rule fails to account for individual risk tolerance, financial goals, and life expectancy. A healthy 70-year-old with a long life expectancy might benefit from a higher stock allocation than a less healthy 60-year-old.
  • Missing Out on Compounding: Compounding is the eighth wonder of the world, and it is very important in the long run. By selling the stock, you are cutting the compounding power.
  • The longevity risk: People live longer, and they need their money to last longer. A conservative portfolio might not generate enough income to support a long retirement.

A More Realistic Approach:

Instead of relying on a rigid formula, investors should:

  • Assess their individual risk tolerance and financial goals.
  • Consider their investment horizon and life expectancy.
  • Focus on building a diversified portfolio of quality investments.
  • Regularly review and adjust their portfolio based on changing circumstances.
  • Understand the power of compounding.

The 100-minus-age rule is a dangerous oversimplification. True investment success comes from informed decision-making, not blind adherence to outdated formulas.

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