Asset Allocation by age is a flawed rule of thumb. Increasing lifespans, expensive bonds and stocks, cause investors to be skeptical. Asset Allocation by Age has experienced various amounts of popularity through different time periods.
Financial planners and Wall Street have joined together over the years to promote rules of thumb and products such as target date funds that have produced mediocre results at best.
Investment Rule of Thumb – Mirror Your Age
The investment rule of thumb in which you mirror your age with your asset allocation (70/30 at age 30, 60/40 stocks at age 40, 50/50 at age 50, etc.) has become so widely accepted that many
Asset Allocation Buy Age
Large investment companies have produced target date mutual funds that coincide with multiple retirement dates. Some advisors are even promoting more aggressive rules of thumb calling for equity allocations subtracting your age from 110 or even 120!
On the face of it, asset allocation by age seems to make sense and there is empirical evidence that the mirror your age rule of thumb worked well for some periods of time. But rules of thumb have a way of gaining popularity and blowing up as times and markets change. So does asset allocation by age make sense now?
Longer lifespans, the most expensive bonds in history, near record equity prices, and increased asset correlations are changes affecting how you should allocate your assets. Bonds carry significantly more risk than at any time in the last 50 years.
Asset correlations have been increasing for years but have accelerated since 2008. In other words, market conditions are different than the time period the mirror your age investment rule of thumb was developed and heavily promoted.
Financial advisors are still promoting these and other aggressive rules of thumb. Successful investors need to adapt to changing market conditions and I believe that means questioning the use of these concepts.
Bonds carry significantly more risk than at any time in the last 50 years. Investors who buy into bonds at today’s prices are accepting low rewards (yield) and high risk to their principal. Bonds may carry more risk than some equities today.
Furthermore, investors who employ buy and hold strategies that include indexing are putting large percentages of their portfolio in equities at prices that historically promise low or even negative returns over the next 20 years.
Further complicating the issue is the fact that life expectancy continues to increase. Every investor should be concerned about losing large amounts of their principal. This by itself makes asset allocation by age less relevant, at least until investors reach ages that are far beyond initial retirement ages.
Valuation Investing vs. Buy and Hold Investing
There is a growing debate between those who still believe in buy and hold strategies and those who recognize that investment decisions should be valuation-based.