How The '100 Minus Age Rule' Helps You Diversify Your Investment Portfolio

When it comes to investing, we are often advised not to keep all our eggs in one basket. That is because making your money reply on a single asset class isn't a smart move. Instead, isn't it better to spread your money into different types of investments, like stocks, mutual funds, bonds, gold, and real estate? This diversification helps reduce the overall risk of losing all your money if one investment doesn¡¯t perform as expected.

And to help you diversify your portfolio, one of the thumb rules we often hear about is the '100 minus age' rule. But what is it? How does it work? Let's find out.

What Is The ¡®100 Minus Age¡¯ Rule?

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The 100-minus age rule is a great way to determine one¡¯s asset allocation. That is, how much should you allocate in equities and how much in debt and other asset classes? For this, subtract your age from 100, and the number that you arrive at is the percentage at which you should invest in equities. The rest can be invested in debt, gold, or other investment avenues.

For example, if you are 25 years old and you want to invest Rs 10,000 every month, as per ET Money, if you use the 100 minus age rule, the percentage of your equity allocation would be 100¨C25 = 75 percent. Then Rs 7,500 should go to equities and Rs 2,500 in debt. Similarly, if you are 35 years old and want to invest Rs 10,000, then according to the 100 minus age rule, the equity allocation would be 100¨C35 = 65 percent. That means Rs 6,500 should go in equities and Rs 3,500 in debt.

Also Read: How The 'Rule Of 72' Can Help Determine The Time Taken To Double Your Money

Why Diversification Is Important

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Diversifying your investment portfolio through asset allocation is important for not just one but multiple reasons:

Risk Management: By diversifying investments across various asset classes, you can easily reduce the risk in the overall portfolio, as the performance of your portfolio is not dependent on one asset class. Also, spreading investments across different assets prevents overexposure to any single asset, reducing the potential negative impact of a poorly performing investment.

Enhanced Returns: You are expected to earn better risk-adjusted returns if you allocate assets according to your financial goals and risk tolerance.

Achieve set goals: Asset allocation strategies help you achieve your financial goals as they spread your investments across different types of assets, considering your risk-taking ability.

Also Read: How To Invest In Real Estate 'Without' Actually Buying A Property

Don¡¯t Confuse Diversification With Duplication

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A commonly committed mistake amongst many investors who attempt to diversify their portfolio is duplication of investments.

When diversification is mistaken for duplication, it leads to the formation of an inappropriate portfolio. While diversification implies investing your money in different asset classes or in different types of securities within an asset class to reduce the overall portfolio risk, duplication refers to the action of creating a portfolio involving similar types of securities, funds, or asset classes that don¡¯t offer anything different to the investor, fail to reduce the overall risk, and the returns also continue to remain suboptimal.

Also Read: How A Lost iPhone Led To Warren Buffett Investing Billions In Apple

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