20. HOW SHOULD YOU ADJUST YOUR INVESTMENT PORTFOLIO AS YOU GROW OLDER?
“The simplest way to decrease risk is to avoid putting all your eggs to one basket(diversification)" -- Jim Dahle
How to allocate stocks and bonds investment by age?
How do you know how to adjust your stocks and bonds investment portfolio as you grow older?
According to CNN Money’s ultimate guide to retirement, the rule of thumb is that you should subtract your age from 100 to find out how much you should allocate towards stocks. If you are 30 years old, you should keep 70% of your portfolio in stocks and 30% in bonds. If you are 40 years old, you should keep only 60% of your portfolio in stocks and increase your portfolio in bonds to 40%. If you are 50 years old, you should reduce your portfolio in stocks further to 50% and increase your portfolio in bonds further to 50%.
The reason behind this logic is that we become more and more risk averse as we age. We also have less of an ability to generate income as we age. Even if some of you have the ability to generate more income as you age, you may not want to do that. You want to retire early to live life, not to spend your older years working. Therefore, it’s better to trade lower returns for higher certainty.
Here is the illustration of asset allocation of stocks and bonds by age in a table format for your easy reference:
Age | Stocks | Bonds |
< 30 | 100% | 0% |
30 - 34 | 70% | 30% |
35 – 39 | 65% | 35% |
40 – 44 | 60% | 40% |
45-49 | 55% | 45% |
50-54 | 50% | 50% |
55-59 | 55% | 45% |
60-64 | 40% | 60% |
65-69 | 35% | 65% |
70-74 | 30% | 70% |
75+ | 25% | 75% |
Ultimately, this stocks and bonds allocation model by age is for those who believe in conventional wisdom and don't want to overcomplicate things. It's also based on the fact that you expect to live to the median age of 78 for men and 82 for women.
I personally prefer simplicity and certainty over complication and uncertainty. As I have reached half a century in my age, the more I want to spend time living my life rather than worry about how much money to make from investments. Hence, as I age, this conventional model suits me perfectly- reducing my investment portfolio from high risk (stocks) to low risk (bonds) over time. Perhaps as you age, you may want to consider this model as a reference to ensure your retirement fund is intact.
How should you adjust your investment portfolio to include property, tangible assets, fixed assets and cash as you grow older?
Do bear in mind that besides stocks and bonds, most of us also have other investment assets (property, fixed deposits, cash, etc) too supplement any shortcomings of returns from stocks and bonds.
In fact, many Malaysians love property investment for its recurring income through rental and capital growth. Many more Malaysians love to put their money in the banks as cash or fixed deposits earning interests in a very safe way.
If you have all these four main asset classes in your investment portfolio, how shall you then allocate your investment portfolio by age?
There is no "one size fits all" to asset allocation. Everyone's specific needs and tolerance levels are uniquely different.
While there may not be a single best asset allocation or diversification that will fit every single person perfectly, I would like to share a general guideline for you to decide on your own asset allocation and investment diversification. .
Again, I would like to stress one again that I’m not a certified financial planner or investment guru. Below general guideline is for sharing purpose. Please refer to it with your own discretion. It’s purely based on my personal experiences as an early retiree, who has walked the path of life, and who has achieved financial independence before 50. It's also based on my personal risk-averse personality who prefers simplicity and certainty over complexity and uncertainty in life.
If you are an aggressive investor who loves to take risks, you could probably find below too conservative. If so, you can increase the percentage of your investments in high and medium risk categories (stocks, real estate and alternative assets) and lower your asset allocation in the very low and low risk investment categories (cash, fixed deposits and bonds).
1. In your twenties
Risk level | Very low | Low | Medium | High |
Age | Cash | Bonds | Real Estate | Stocks |
20-29 | 40% | 0% | 0% | 60% |
As you first begin your career in your twenties, you should first invest the majority of your hard-earned money from your 9-to-5 job into stocks. You can invest in stocks through Employees’ Provident Fund (which is mandatory deduction from your monthly salary anyway), Amanah Saham Nasional, unit trust, or opening an individual stock trading account.
By doing so, you can tap on the compound interest effect of money and capital growth of stocks' nature over a long term period to grow your principal and returns. If you are willing to take higher risk, you can also choose to invest more in high-growth but riskier stocks locally or regionally. Your intention is to keep your money for the next 20-30 years. Over the long term, it shall help to weather the risk and effect of any downturns.
Besides stock investment (high risk investment type), you shall park some money aside in your fixed deposits for emergency use, as well as saving up enough cash for your eventual down payment on your first property: apartment, condo or house.
I know many of you need a car to commute to work. It’s also probably the first big ticket item that you are likely to purchase after you get your first job. But it should be the last thing to consider buying. If you can drive your family members’ car for the first few years in your twenties, please try to delay purchasing your own new vehicle. The reason is that car is not an asset. It’s a liability. There is no capital growth in car. Instead, car depreciates in value over time. If you really need to buy a car, do consider buying a reliable used-car or an economical, fuel-efficient new car instead of a fancy car. With the money you save from buying a cheaper car, you can then use it for your first property’s down payment. It will help you to realise your home ownership dream sooner.
2. In your thirties
Risk level | Very low | Low | Medium | High |
Age | Cash | Bonds | Real Estate | Stocks |
30-39 | 15% | 5% | 30% | 50% |
When you reach your thirties, your career is already better established. You probably have received job promotion or other job offers with your work experience. Your salary has increased. Your purchasing power has become stronger. You have more money to invest.
By now, if you are already in relationship, you probably plan to start your own family as well. This is the perfect time to become a property owner. You can cash out from your fixed deposits that you saved in your twenties and use it as your first down payment for your first apartment / condominium or house. Probably, by then you may not have much cash left in your account.
On the positive side, you have successfully diversified your investment portfolio into the medium growth asset class- real estate. You become a proud owner of your own home.
As you start to build up your cash position again (it should be easier now because your pay is definitely more than your earnings in your twenties), you need to start paying for your housing loan. If you have extra cash, you can also look into tangible assets like gold or silver to invest if you have interests in them.
Investment in bonds is something you may want to consider in your thirties as well. No doubt it’s a defensive investment compared to stock, but potentially it will yearn higher returns than cash in the bank for you. It also provides some liquidity for you should you decide to cash out from your bonds.
Overall, your diversified investment portfolio in your thirties is probably around 50% in stocks, 30% in real estate and tangible assets, 5% in bonds and 10% in cash/fixed deposits.
Please don’t forget to use your savings to invest in yourself too for your personal development. You can attend motivational courses, self-improvement seminars, or even obtain your MBA degree to further boost up your earning potential in your career.
3. In your forties
Risk level | Very low | Low | Medium | High |
Age | Cash | Bonds | Real Estate | Stocks |
40-49 | 10% | 10% | 40% | 40% |
You are probably reaching the pinnacle of your career in your forties. You are at the prime time to maximise your potential income in your career. This is probably the time you will see your net worth continue to grow at an exponential rate.
Should you manage to settle all of your outstanding housing loan balance from your first property investment, it's time to consider investing in your secondary or third property for rental and capital growth purposes.
Even though you are at the height of your career with high earnings in your forties, you should consciously keep in mind that you are getting closer to your retirement age too. Hence, it’s good to start minimising your risk exposure.
You can have around 40% of your investment portfolio in stocks by now, reducing it by about 10% from the time when you were in your thirties. It's also good to rebalance your stocks, switching from high-growth stocks to more of dividend-based stocks. A more balanced and conservative mix will be a good planning for a more certain early retirement.
Do not be misled by the stock investment percentage thinking that a reduction means you invest less money in stock. On the contrary, the amount you invest in stock is probably more than what you had invested in your twenties or thirties due to your high income in your forties. The reduction is percentage is simply showing you your investment diversification and how stock investment stands compared to other investment types.
By now, it's also time to slowly invest more into bonds (10% of your investment portfolio)) while keeping around 10% of your investment portfolio in cash and fixed deposits.
If you invest in yourself and your career, if you live frugally saving your hard-earned money, and if you have a diversified portfolio with decent investment returns, you can probably retire by age 50.
Do you know that only 4% of the world population can retire by 50? You can be one of the blessed ones who has achieved your financial independence to live the life you want. You can opt to continue working or start living your life fully in your late forties or early fifties.
4. In your fifties and beyond
Risk level | Very low | Low | Medium | High |
Age | Cash | Bonds | Real Estate | Stocks |
50-59 | 10% | 20% | 40% | 30% |
60-69 | 10% | 30% | 40% | 20% |
70+ | 10% | 40% | 40% | 10% |
When you are in your fifties and beyond, you shall focus on simplicity and certainty over complexity and uncertainty.
By now, you shall have no debt. Any housing loans you may have shall all be fully settled.
Marching into half century of your age, you can’t afford to risk losing your retirement fund through high-risk investments. Time is not on your side. If you can, relook at your stock portfolio to ensure most of them are either in big caps and dividend stocks instead of start-ups or some emerging markets with higher risks. The key is - lower your exposure to stock fluctuations. You may not have another ten or twenty years to weather the storms of any financial crisis.
Besides relooking into your stock portfolio to reduce your risk, you may also want to slowly reduce your percentage in your stock investment portfolio and rebalance it with lower-risk investment in bonds and even cash and fixed deposits. Bonds may not gain you high return, but it’s definitely safer.
Your investment portfolio in stock shall slowly reduce from 40% in your forties to 30% in your fifties, 20% in your sixties and 10% in your seventies. You rebalance it with your increased investments in bonds instead, from 10% in your forties, to 20% in your fifties, 30% in your sixties and 40% in your seventies.
If you aspire to give yourself more time to live a life true to yourself with no regrets, you may retire early in your fifties before the mandatory retirement age of 60. Should you decide to do so, you will then lose your future monthly pay cheque. But what you gain is time freedom to chase after your unfulfilled dreams. You can then use the “Multiply by 25” rule to know how much you can withdraw monthly so that you can continue to live your life happily until age 100 without having to work a single day again.
Alternatively, you can choose to continue working knowing that you have already achieved your financial independence and you can quit your job anytime you want.
In case you haven’t achieved your financial impendence in your fifties, you may still need to continue working to earn a living.
Regardless of what financial situation you are in, always go back to simplicity and certainty over complexity and uncertainty when you reach your retirement age.
SECTION 4
Make Your Money Work for You
“Either make your money work for you or you will always have to work for your money.” -- Marshall Sylver
F I L L
Financial Independence, Live Life
achieving financial independence from 9-to-5 job before 50
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