It’s a question asked often - ’how much should I invest?’.
When it comes to average savings by age, the answer is whatever you can afford. The answer is just as simple for investing, it’s whatever you can realistically afford to stash away each month and not touch for the next 10 years or so.
But, if you want to achieve wealth and meet your goals, there is one investing rule that can help you determine the right investment allocation for you and help you take the right level of risk.
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Whether you are an experienced or a beginner investor who is looking to get started with stocks and shares, there’s a formula known as ‘100 minus your age’ that many experts suggest you can follow.
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While the rule is not attributed to any particular investor, the strategy is well-known among the industry and advisors.
But what is this rule, how does it work, and is it worth following?
What is the 100 minus your age rule?
The concept is simple. You minus your age from 100. Whatever that figure is, that is the percentage you should then allocate to equities and then rest in other low risk assets (like bonds, for example).
So, if you are 40, then 60% should be put into stocks and the rest in a low-risk fund.
If you are, for example, looking to put away £100 every month, you would put £60 in equities and £40 into a lower risk investment, like bonds.
If you’re 25, the £100 equates to £75 going into equities and £25 towards lower-risk investments.
If you’re 30 and have £1,000 you would like to invest, then the rule suggests £700 into equities and £300 into a lower-risk position.
The concept behind this strategy is simple: the older you are, the less risk you should take with your investments.
The rule was first talked about when bond returns were strong. In 1981, bond yields were in excess of 15%. Today it’s just over 4%, but in 2020 it was around 0.6%. So, if you are looking to put into bonds and are close to retirement, this could cause a shortfall if you are relying heavily on the bonds as the average return may not look so healthy.
Should you follow the 100 minus your age rule?
Like anything when it comes to investing, the 100 minus your age is simply a guide, and how you invest will depend on not just your age, but your goals and even your life expectancy.
Some experts use a variation of the rule such as 120 minus your age, meaning you end up with a higher ratio allocated to equities.
So, if you are 40, you’d have 80% in equities, if you’re 25, you’d have a 95% weighting towards equities.
Alternative ‘rules’ to follow for investing
While no rule is ever a guarantee and there are several money rules to follow to build wealth, another strategy is to consider the ‘rule of 72’ which can help you work out how long it takes to double your money.
The rule requires you to divide 72 by your estimated rate of return.
So, say if your estimated annual return is 8%, then it’s 72÷8 = 9. Using the rule of 72, it means it would take you nine years to double your money with that rate of return.
The higher your return, the faster you can get there.
If you invested £10,000 at 30, and your average return was 8%, it is estimated you will have around £20,000 before 40.
This rule could help work out how long you want to invest based on your goals.
This rule was originally introduced by mathematician Luca Pacioli in the 1400s, but is still popular today to help work out the concept of building wealth.
