Short read: How Should Your Allocation Change With Age?

It’s that stage of the market cycle when we tend to search for answers to questions like “should I pull out of the market to prevent a further erosion in my portfolio? What if it rebounds and I miss out? Should I buy the dip? Should I stop or continue with my SIPs”. Answers to all of these will require timing the market, a skill that is fictional in nature. Instead, a disciplined approach to asset allocation combined with systematic rebalancing is known to obviate the need to answer these questions. We see very few investors in India taking this route. Even the few who do seem to struggle with nuance. The good folks at Ritholtz wealth with their blogs and books have been a reliable source for personal finance insights. This article is one such piece which questions the age-old assumption of reducing risk in your portfolio with age.

“The reasoning for this is simple—as we age we have less time to make up for any drawdowns in equities, so we must dial back our risk accordingly.

…Most of the age-based allocation advice focuses exclusively on the risk we take in our portfolios. However, we know that financial risks aren’t isolated to our brokerage and retirement accounts. Therefore, when we take into account the risks within the larger context of our lives, we can come to some surprising conclusion. And these conclusions don’t always agree with the traditional age-based allocation rules.

For example, instead of having the lowest allocation to equities when you are oldest, you might consider having the lowest allocation to equities when you have the most liabilities. For many people this isn’t when they are 65, but when they are mid-career with a growing family. Yes, a 45-year-old has an extra 20 years to make up for a drawdown, but they also have more mouths to feed in the medium term than a 65-year-old.

If you incorporate big picture risks like this into your allocation decisions, then your asset mix can deviate a bit from the traditional age-based approaches.”