Have you ever been uncertain about what your portfolio equity allocation should be? You may have relied on the “100 minus your age” rule. It determines this ‘magic asset mix’ for you in seconds!

For example, at age 65 you would have 35 percent in equities and 65 percent in fixed income investments. Easy peasy.

What if I told you this rule can get you into trouble? Here are some reasons why.

Rate of return

If you need a 6 percent, 7 percent, or an even higher rate of return to meet your goals, a portfolio with just 35 percent equity is not going to get you there.

Conversely, if you only need a 3 percent rate of return to meet your goals and/or you’re a conservative investor, you don’t need a ton of equities and the volatility that comes with that asset class.

Volatility

When using the rule, you may be left with a level of equities that is more volatile than you can handle. The risk here is that when your portfolio declines, you might feel so uncomfortable that you sell some or all of your equity investments at the worst possible time.

It is important to have an investment strategy you can stay disciplined to. Having a portfolio that creates discomfort and fear means that you are more likely to make costly decisions.

Pension income

Another factor to take into consideration is if you have solid pension income. That could be CPP, OAS, or a company pension that may or may not be indexed to inflation.

If most of your basic needs are covered by pension income, you could treat that as the fixed income portion of your overall strategy. Therefore, you could boost the equity in your liquid investments to compensate for the solid fixed income stream.

Longevity

When the rule was created, we weren’t living as long as we are now. Lifestyle aspirations have also changed since then. As a result, our retirement money needs to work longer than ever before. Your nest egg may need to generate returns for 30 years or longer!

With that time horizon, some equities are appropriate. At the very least, your money should grow at the rate of inflation to maintain your purchasing power over time.

Deciding how much equity to have in your portfolio is not easy, so don’t rely on a shortcut to make that decision. View yourself as a unique individual and seek advice that does the same.

With that time horizon, some equities are appropriate. At the very least, your money should grow at the rate of inflation to maintain your purchasing power over time.

Deciding how much equity to have in your portfolio is not easy, so don’t rely on a shortcut to make that decision. View yourself as a unique individual and seek advice that does the same.

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  • This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability.