Updated on 08.28.14

#7: Stock Portfolio

Trent Hamm

25 Rules to Grow Rich By

This is part of 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.

How Much Should I Invest in Stocks?

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.

You can jump ahead to rule #8 or jump back to rule #6.

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  1. Hmm, by this rule, I should have 80% of my money out of stocks at age 70? I think that’s a little conservative. What if you live another 30 years? Not only are you missing out on a lot of gains, but you’ll likely be drawing that nest egg down for awhile.

    I’d probably go with a number of 40, so that at 70, you have 40% in stocks. That should be enough to grow on for the next 30 years if you need it.

    Maybe I’m optimistic in thinking that people will live long times.

  2. Damian says:

    Hmm…. this can’t be right… with either of the 2 rules…

    I’m currently 19 (yeah, you have teenagers reading a financial blog :S)
    Anyway, 120 – 19 = 101
    Based on the old rule, I should have 101% of my money should be in stocks… not really possible that, as I only have 100% money

    And based on the second rule, 19 – 30 = -11
    So -11% of my money should not be in stock, does that mean 111 should be in stock??? Again, not possible

  3. Teenanon says:

    This is weird….
    -17*2 is -34
    is my math right?
    so this is saying you have to be 31 to not get zero or lower for your percentage. At 31 it’s only 2% anyway this says. Are you saying you should be 30 to start investing at all? Or that you should invest it all before you are 30?
    Is my math right?? I think so

  4. Matt says:

    I think Trent’s rule is sound. My understanding of it is if you are under 30 then nothing should be not in stocks (aka ALL should be in stocks) or as he recommends in index funds.

    I don’t think there is any age when you shouldn’t learn about personal finance. You guys who are reading this at 17 and 19 will be in great financial shape if you learn about finances now.

  5. boardmadd says:

    The math is not meant to be an absolute figure, and yes, if you are under the age of 20, then it’s not going to work cleanly.

    The point is that, if you are just entering the work force, and you have a *lot* of time ahead of you to plan for retirement, then being invested 100% in stocks or stock funds would make sense.

    However, as you get older and are getting closer to that retirement date, then you need to consider pulling back and exposing a little less of your money to risk and perhaps consider other options. On my end, I am looking at changing alocation from funds and stocks that are mostly growth oriented (i.e. their value is determined by their actual stock price) and moving into more investments that pay dividends as a higher percentage of my holdings as I get older (I’m currently 40).

  6. Roger says:

    This is an interesting revision. It might just be my fairly-high risk tolerance, but I think your rewritten rule gets a bit too conservative, too quickly. I mean, down to 60% in stocks by age 50, 30% by 65, and completely out by age 80? As Lazy Man said, it seems to be giving up a lot of potential growth, especially if you go on to live to 100 (or longer).

    Of course, the problem with any rule of thumb is that we all have different thumbs; what seems reasonable to me might seem rather risky to you, or vice versa. And trying to predict how much risk I’ll be willing to tolerate (or require to keep and grow my nest egg) thirty or forty years from now definitely complicates matters. Thanks for the food for thought, at least.

  7. Kris says:

    This advice seems more sound now that we have gone through a huge downturn. I know there are many 50 – 60 year olds in my company that are complaining how they are stuck here cause they had their retirement heavily in stocks when the market dropped. They don’t necessarily have or didn’t want to take 15 years for it to get back where they were. It has always been good advice to start moving away from stocks and into stable investments (i know they get smaller returns) and I think the re-written rule is definitely sound advice.

  8. JustinJamm says:

    Great! Since I’m young, this re-write means I should have 100% in stocks, which I basically do, if you count my bond fund as a stock and my gold stock as a stock rather than as a precious metals investment.

    Both again, I *AGREE*. =)

  9. Red says:

    Umm…a bond fund by it’s very definition is NOT stock or a stock fund, it’s exactly the kind of thing that Trent is referring to when he says “NOT in stocks”. Your gold stock may or may not be “stock”–if you own shares of a company that MINES for gold or builds mining equipment, it’s a stock, if you own a piece of a commodities type fund that HOLDS gold, it’s an inflation hedge, not a stock for the purposes of this conversation. Nothing wrong with bond funds and commodities (or other diversification funds such as REIT’s) but they are for your “not in stocks” money. I am slightly more conservative (I’m currently 35 and shooting for retirement at 48 once the kids are in college) so I’m holding a little higher percentage of fixed income (20%) and REIT (10%) but for a traditional retirement age I think your numbers are good for the under 60 crowd. Personally, I plan on holding at least 35-40% in stocks until I die at the age of 105.

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