Should You Change Your Asset Allocation as You Get Older?

Asset Allocation By Age

The conventional wisdom is that you should shift your portfolio into more conservative assets as you approach retirement. One oft-quoted rule of thumb is that the amount of money you should hold in stocks should equal 100 minus your age. So a 60-year-old would only have 40% in stocks (100 – 60 = 40), whereas a 25-year-old would have 75% (100 – 25 = 75). The thinking is that as you get closer to your retirement date, you have less time to make up for any bear markets and are thus less able to take on risk.

This is logical sounding advice, however it is supported by little actual evidence. Historical simulations of how thousands of different asset allocation strategies would have fared over the past century have not shown that decreasing exposure to risky assets at the end of an accumulation period increases the likelihood of a portfolio’s success at all (here “success” was defined as a portfolio that outlived its owner).

If you have built up a bit of a war chest that you do not want to risk in the markets, an alternative to adjusting the asset allocation of your investment portfolio is simply to increase the size of your emergency reserve fund. For instance, let’s say you are lucky enough to have $5 million and you decide that you want to ensure that $1 million is as risk-free as possible. To protect the $1 million, you put it into bank accounts or short-term TIPS and then invest the remaining $4 million.