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Potential Pitfall: Age Doesn’t Equal Asset Allocation

Since asset allocation is so important, advice on what’s the “right” asset allocation abounds. Something you commonly read (or hear): Simply take 100 (sometimes it’s 120), subtract your age and that’s how much you should have in stocks. Adherents of this rule of thumb believe, if you’re 60, you should have 40% stocks, 60% fixed income. If you’re 80, it’s 20/80. If you’re 20, it’s 80/20.

Sounds easy! It’s a concrete prescription, which a lot of people like. Eliminates any guesswork. Except this rule of thumb presumes the only thing that matters is your age. Not your goals. Not your cash flow needs. Not your time horizon. Not your intended purpose for your money. Not your spouse! One input and only one input matters—your birth year.

You can’t get much more cookie cutter than that.

See it another way. There are two investors, Jim and Bob, both age 60, each with $2 million saved. The subtract-your-age crew would say, definitively, both should have 40% stocks and 60% fixed income. Identical portfolios!

But hang on! Jim is in excellent health. His wife, Mary, is 10 years younger and also in excellent health—they both love skiing with the kids and play tennis twice a week. They own their own consulting firm, and just now, the business is really taking off. Neither Jim nor his wife plans on retiring for another 10 years. Love what they do! Jim’s and Mary’s parents are all still alive—Jim’s in their 90s and Mary’s in their 80s. Mary’s ...