100 Minus Your Age – A Strong Rule of Thumb?

100 Minus Your Age – A Strong Rule of Thumb?

This week marks the 8th anniversary of the market lows hit during the Financial Crisis.  On March 9, 2009, the S&P 500 closed at 677, a decline of nearly 56% from its highs seen just a year and a half earlier.  The world was in a panic.  People of all ages were seeing their life savings evaporate and giving up on hope that markets would stabilize.  Comfort was hard to find.

I thought it would be interesting to look back and see how some of the simplest portfolios would have performed over the last decade, through the Financial Crisis.  An old rule of thumb for diversifying your portfolio between stocks and bonds is to subtract your age from 100, and allocate that percentage to stocks.  For example, if you are 30 years old, allocate 70% of your portfolio to stocks (100-30) and 30% to bonds.  Easy enough…

We’ll use the time period January 1, 2007 through December 31, 2016. Assume a starting portfolio value of $1 million, stock/bond allocations remain constant throughout the decade and the portfolios are rebalanced annually.  For the stock allocation I am using the S&P 500 Total Return Index and for bonds, I am using the Barclays US Aggregate Treasury Index.


One interesting observation is that despite the big disparity in stock/bond mixes, the ending values of the portfolios after 10 years aren’t all that different.  The riskiest portfolio (70% stocks/30% bonds) ends the period only about 14% higher than the least risky portfolio (25% stocks, 75% bonds).


As you can see, a little bit of diversification goes a long way.  Even if you suffered through a 34% drawdown in your portfolio, less than 2 years later you would have made your money back.

Now let’s consider some realistic use cases for these portfolios.  Most portfolios aren’t static.  People still working would likely be adding savings to the portfolio and those who are retired would likely be withdrawing money.  Here are a few reasonable scenarios.  Again, assume the starting parameters do not change (salary, savings rate and portfolio mix remain constant).




Over the 10-year period, all of these individuals would have done pretty well for themselves.  Sure, the 65 and 75-year-old have smaller portfolios than they started with, but they are also 10 years older and were able to withdraw $60,000 each year to live on.  The 30-year-old saw her portfolio grow by $280k over the period and her portfolio only took 9 months to recover from a 27% drawdown.  Not bad, right?



Hindsight is 20/20, but historically, this very basic diversification strategy would have served most people well.  There’s plenty to consider when we think about finding a portfolio strategy that suits our needs.  Everybody is different, but generally speaking, if you diversify, risk less as you get older and have conviction in what you are doing, things will probably turn out ok.  Rules of thumb aren’t perfect, but they are usually simple and for most people, the simpler the approach, the better the outcome.

Further Reading…

Three Simple Rules for Investors

At Ariadne, I work closely with families and individuals to organize their finances and utilize their resources to design a life they love.  If you are interested in a straightforward, no-gimmick approach to financial planning that focuses on you and your needs, don’t hesitate to get in touch.  I’d be happy to have a conversation.

Tim Brennan

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