The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.
Rule #7: To figure out what percentage of your money should be in stocks, subtract your age from 120.
This is an old, old rule that has been around in some form since my grandpappy was in diapers; back then, you were told to subtract your age from 100.
But let’s think about this for a minute: according to this rule, at age 70, you should have 50% of your investment in stocks? That seems rather risky to me, as you should want a high degree of stability during your twilight years.
On the other hand, why would investors under 30 want to invest their money in low-return things (unless it is for liquidity purposes, of course)? If an individual is looking at the vast majority of their life still ahead of them, why not invest everything in an index fund that will return tremendous amounts in the future?
This rule is a nice little rule for people in middle age, but it doesn’t take into account the oldest or youngest investors who should either be maximizing or minimizing their risk based on what their futures hold. Let’s rewrite this rule so that it encompasses everyone, then:
Rewritten Rule #7: To figure out what percentage of your money should not be in stocks, sutract 30 from your age and then double that number.