Investment-Strategies: Share ratio = 100 minus your age
The simple rule of thumb for structuring your portfolio
Shares or bonds – which product is better for investors in the long run? This is a question without a general answer, because both types of investment have pros and cons. Therefore, a well-mixed portfolio should contain both. The advantage of shares is their long-term earnings strength. One cannot earn as much with bonds, but they, on the other hand, have the huge advantage of lending stability to one’s portfolio – as long as it does not include risky titles such as junk bonds. Otherwise, losses are virtually ruled out as long as the title is not sold before its maturity date. However, finding the right mix of stocks and bonds is not actually that simple.
The investor’s willingness to take a risk is often used as a
measure when thinking about the percentage of shares in an
investment portfolio. Two factors make this problematic, though:
setting the share quotient based on risk factors depends on the
situation on the financial markets at that time. And investors have
to make sure that the timeline is long enough, so that even larger
losses on the stock market can still be recuperated.
There is quite a simple strategy for long-term oriented investors to control this risk. The decision on the share ratio in their portfolio should be based on the investors’ age. Even exchange guru André Kostolany relies on this formula: 100 minus your age. For there is the general rule that the longer your investment horizon, the higher can or should be the proportion of capital invested in shares. In fact, the statistics show that even high price losses are compensated for after ten years at the latest. This means that a 60-year old person should invest no more than 40 percent of its capital in dividend titles, while 20-year olds can easily invest 80 percent.
The idea behind this is a simple one: young investors – with the
exception of heirs to large estates, show and football stars –
can’t really lose on the stock markets, but rather have a lot to
gain. Their capital is still rather small. Moreover, they have
plenty of time to absorb losses from share investments. The older
the investor, the more this situation changes. Those who actually
need their accumulated capital sooner rather than later, for
instance when it comes to maintaining their livelihood, have more
to lose than to gain. First of all, slumps on the stock market come
at a higher cost to more wealthy investors, and secondly, they have
less time to make up for such losses.
The formula sounds plausible. But even though the investment tactic of “100 minus your age” has proved successful in the past, investors should be aware that it is only a rough guide, because any investor who randomly selects shares and bonds for his portfolio can still suffer a near total loss. In the end, there are some bond products that are significantly riskier than some shares - bonds from developing nations, for example. Investors who put money in Argentinean bonds some years ago are today still nervous about their chances of ever seeing that money again, since the country no longer serves these titles due to interest and debt schedules that have gotten too burdensome. And everyone who, at retirement age, needs their money to pay for living expenses should invest zero percent of their money in shares rather than 35 percent.