Loding Loading ...
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Wednesday, June 17, 2020

Asset Allocation for Different Age Groups

By Century Financial in Investment Insights

Asset Allocation for Different Age Groups

Asset Allocation for different age groups

Investment experts preach it, fund managers endorse it and financial planners follow it like a religion. Yet, the importance of asset allocation is generally lost on retail investors.

Asset allocation is another name for diversification but among different asset classes. It is about how the investments are spread across different asset classes such as equities, fixed income, commodities, forex, and other alternative assets such as real estate, artwork etc. The allocation could be based on one’s age, risk profile, or nearness of goals/investment objectives. It is one of the most important decisions that investors make as the way that assets are allocated among different asset classes are the primary determinant of the portfolio’s returns than the selection of individual securities.

What is asset allocation

What is asset allocation

The primary purpose of asset allocation is to earn a return on investment while managing risk. There will, of course, always be market risk (systematic risk)— the risk that an entire market will decline. In the 2008–09 market rout, even the most diversified portfolio took a beating as all asset classes fell in tandem. However, the losses were lower when compared to a portfolio that solely focused on equities/risky assets. The bottom line is that risk cannot be eliminated entirely and clearly savings account isn’t the solution to this, because inflation over time, will outpace the meager interest rates and eventually result in a negative return. The good news is that smart asset allocation can be instrumental is managing some amount of market risk because different categories of investments respond differently to changing economic and political conditions. By including various asset classes in the portfolio, the investor increases the probability that some of assets will provide satisfactory returns even if others decline. Put another way, chances of major losses that can result from over-emphasizing on a single asset class reduces.

Factors to decide asset allocation

Factors to decide asset allocation

Primary Factors to decide the asset allocation Strategy

. Time Horizon . Risk Tolerance

Investment timeline and risk tolerance to a great extent depends on an individual’s age among other factors. In terms of retirement, asset allocation will look very different at the age of 25 than it will at the age of 75. An individual in 20s, can remain invested for 30-50 years before the money is required back, thus more weights can be allocated to aggressive investments such as equities, real estate, commodities etc. that have high growth potential (but also higher risk). Post retirement, one no longer has decades left for the investments to grow and would probably need to withdraw money every year. At that stage, one can’t afford for the portfolio to have a bad year. Therefore, as individuals approach retirement age, portfolios should generally move to a more conservative asset allocation which focuses more on bonds & money market funds to help protect assets that have already been accumulated.

As an example, the S&P 500 declined by 49.2% from March 24, 2000, to Oct. 9, 2002 and by 56.8% from Oct. 9, 2007, to March 9, 2009. Imagine a person in his 70s having invested 100% in equities in any of these periods. Market corrections like these are very problematic -both emotionally and financially. Emotionally, the stress level spikes up and the investor might even get spooked and sell. Financially, selling stocks at the bottom of the market locks in the losses and puts the investor at risk of missing the recovery. Even if the assets are held, the math of market losses is ugly: 50% loss requires 100% gain just to get back to the original portfolio levels. Retirees do not have the luxury of waiting for the market to rebound after a dip. Besides, individuals become more risk averse as they age, given they have less of an ability to generate income. Hence, they are willing to trade lower returns for higher certainty.

On the other hand, had an individual in his 20s or 30s, only invested in bonds, he would have missed out on a massive +2500% rally in equities (SPX) over the past 40 years. Hence, it would always be prudent on the part on the investor to not place all bets in one investment scenario and diversify according to his/her risk tolerance and investment timeline.

How safe one should be relative to the stage in life?

The dilemma is figuring out exactly how safe one should be relative to the stage in life. The classic recommendation for asset allocation is to subtract one’s age from 100 to find out what percentage should be allocated towards stocks/other risky assets.

However, over the past few decades, a lot has changed for the investors. The life expectancy in many developed countries has steadily risen. Not only do individuals have to increase their nest eggs, but they also have more time to grow their investments and recover from any dips. At the same time, U.S. Treasury bonds are paying a fraction of what they once did. As of May 2020, a 10-year T-bill yields less than 0.7% annually compared to upwards of 10% in the early 1980s. Such realities suggest that the old 100 minus your age adage can put investors in jeopardy of running low on funds during their retirement years. As a result, many consultants have modified the rule to 110 minus your age or even 120 minus your age, for those with a higher risk tolerance. Not surprisingly, many fund companies abide by these revised guidelines when assemble their own target-date funds. For example, the Vanguard Target Retirement 2035 Fund geared to investors who are currently in their 50s (as of 2020) has roughly 75% allocated to equities.

Asset allocations for different ages. (For simplicity sake only stocks and bonds have been considered)

20s to 30s: Common wisdom holds that people in their 20s or 30s saving for retirement can load up on risk because they’ve got plenty of time to ride out unavoidable rough patches. Many consultants even recommend all-stock portfolios for this demographic.

40 to 50s: One can continue to go heavy on stocks if saving for retirement as the investment duration is long enough to survive any market turbulence.

50+: Stepping into 50s, a blend of 60% stocks and 40% bonds should do the trick. These numbers can be adjusted according to the individuals risk tolerance.

Asset allocations for different ages

Asset allocations for different ages

60-70s: Once in retirement age, an investor with moderate or aggressive risk profile may prefer an allocation of 50% tocks and 50% bonds. While a conservative investor may opt for the 100 minus age rule.

These rules attempt to define asset allocation solely by the investors age. But it’s important to understand that an individual’s financial situation and nearness of goals can be just as important. Any money required within the next 2-3 years should be held in investment-grade bonds with varying maturity dates or in money market instruments. The emergency fund should also be entirely in cash or cash equivalents and this money should be available at a moment's notice.

It’s also important to distinguish between the ability and willingness to take risk. The investor may be willing to take risks, but his financial situation may not permit him to do so. An individual in his 30s, who has just lost his job, cannot invest all his savings in equities if the savings are meant for a child’s education program starting in two years. Meanwhile, if an investor at 60 has sufficient surplus funds and is seasoned enough to stay cool through market cycles, then he/she can go ahead and hold more risky assets. On the other hand, if every market correction strikes fear into the investors’ heart, then probably a more balanced approach would suit the investor. The idea is that asset allocation should provide the investor peace of mind. The investor probably won't have the highest returns on the block but will probably sleep better at night.

Asset allocation benefits

Asset allocation benefits

Whatever be the case, all these arguments make a strong case for diversified portfolio through smart asset allocation and as Harry Markowitz once said diversification is "the only free lunch in finance."

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

Disclaimer: Century Financial Consultancy LLC (“CFC”) is Limited Liability Company incorporated under the Laws of UAE and is duly licensed and regulated by the Emirates Securities and Commodities Authority of UAE (SCA).This document is a marketing material and is for informational purposes only and must not be construed to be an advice to invest or otherwise in any investment or financial product. CFC does not guarantee as to adequacy, accuracy, completeness or reliability of any information or data contained herein and under no circumstances whatsoever none of such information or data be construed as an advice or trading strategy or recommendation to deal (Buy/Sell) in any investment or financial product. CFC is not responsible or liable for any result, gain or loss, based on this information, in whole or in part. Please carefully read disclaimer mentioned below/next page/next frame.


By use of the publication and continuing to access the publication, you accept these terms and conditions and undertake to be bound by the acceptance. CFC reserves the right to amend, remove, or add to the publication and Disclaimer at any time without any prior notice to you. Such modifications may be effective immediately or otherwise. Accordingly, please continue to review this Disclaimer whenever accessing, or using the publication. Your access of, and use of the publication, after modifications to the Disclaimer will constitute your acceptance of the terms and conditions of use of the publication, as modified. If, at any time, you do not wish to accept the content of this Disclaimer, you may not access, or use the publication. Any terms and conditions proposed by you which are in addition to or which conflict with this Disclaimer are expressly rejected by CFC and shall be of no force or effect.

No information as given herein by CFC in this publication should be construed as an offer, recommendation or solicitation to purchase or dispose of any securities/financial instruments/products or to enter in any transaction or adopt any hedging, trading or investment strategy. The data/information contained in the publication is not designed to initiate or conclude any transaction. Neither this publication nor anything contained herein shall form the basis of any contract or commitment whatsoever. Distribution of this publication does not oblige CFC to enter into any transaction. The information in this document is not intended, by itself, to constitute independent, impartial or objective research or a recommendation from CFC and should not be treated as such.

The content of this publication should not be considered legal, regulatory, credit, tax or accounting advice. Anyone proposing to rely on or use the information contained in the publication should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts regarding information contained in this publication. CFC cannot be held responsible for the impact of any transactional costs or any taxes as may be applicable on transactions.

Information contained herein is based on various sources, including but not limited to public information, annual reports and statistical data that CFC considers reliable. However, CFC makes no representation or warranty as to the accuracy or completeness of any report or statistical data made in or in connection with this publication and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this publication. References to any financial instrument or investment product does not imply that an actual trading market exists for such instrument or product. In publishing this document CFC is not acting in the capacity of a fiduciary or financial advisor.

The report does not take into account the investment objectives, financial situations and specific needs of recipients. The recipient of this publication must make its own independent decisions regarding whether this communication and any securities or financial instruments mentioned herein, is appropriate in the light of its investment objectives, investment experience, financial situation, existing portfolio holdings and/or investment needs. Recipients will need to decide on their own as to whether or not the contents of this document are suitable for them.

This document is a marketing material and has been prepared by individual(s), marketing and/or research personnel of CFC. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is purely a marketing communication. In this publication, any opinions, news, research, analysis, prices, or other information constitute is a general market commentary, and do not constitute the opinion or advice of CFC or any form of personal or investment advice. CFC neither endorses nor guarantees offerings of third party, nor is CFC responsible for the content, veracity or opinions of third-party speakers, presenters, participants or providers. CFC will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Charts, graphs and related data or information provided in this publication are intended to serve for illustrative purposes only. The information contained in this publication is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to their determination. All statements as to future matters are not guaranteed to be accurate. CFC expressly disclaims any obligation to update or revise any forward-looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.

The information in this communication cannot disclose everything about the nature and risks of the abovementioned data / information. This is not an exhaustive list of the risks involved, nor should it be regarded as offering advice on the suitability of these investments for the recipient.

All views expressed in all reports, analysis and documents are subject to change without notice. CFC may have issued other reports, analysis or other documents expressing different views from the contents hereof. Staff members/employees of CFC may provide/present oral or written market commentary or analysis to you that reflect opinions that are contrary to the opinions expressed in this research and may contain insights and reports that are inconsistent with the views expressed in this publication. Neither CFC nor any of its affiliates, group companies, directors, employees, agents or representatives assume any liability nor shall they be made liable for any damages whether direct, indirect, special or consequential including loss of revenue or profits that may arise from or in connection with the use of the information provided in this publication.

Information or data provided by means in this publication may have many inherent limitations, like module errors or lack accuracy in its historical data. Data included in the publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, credit risk etc.

CFC and its affiliates reserve the right to act upon or use the contents hereof at any time, including before its publication herein. The use of our information, products and services should be on your own due diligence and you agree that CFC is not liable for any failure to achieve desired return on investment that is in any manner related to availing of services or products of CFC and use of our information, products and services. You acknowledge and agree that past investment performance is not indicative of the future performance results of any investment and that the information contained herein is not to be used as an indication for the future performance of any investment activity. Any prices provided in this document are indicative only and do not represent firm quotes as to either price or size. The value of any investment or income may go down as well as up. All investments involve an element of risk, including capital loss.

This publication is being furnished to you solely for your information and neither it nor any part of it may be used, forwarded, disclosed, distributed or delivered to anyone else. You may not copy, reproduce, display, modify or create derivative works from any data or information contained in this publication. This document may not be published, circulated, reproduced, or distributed in whole or part to any other person (whether within or in a jurisdiction outside UAE) without the prior written consent of CFC.

Declaration of the Financial Analyst

The analyst(s) who prepared this report certifies that the opinions contained herein accurately and exclusively reflect his or her views. The Analyst further undertakes that he or she has taken reasonable care to maintain independence and objectivity in respect of the opinions herein. The analyst(s) who wrote this report does not hold securities in the Company mentioned in the report. The analyst(s) receives a fixed compensation from CFC. No part of his or her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this report. The business solicitation or marketing departments of CFC are separate and independent from the reporting line of the analyst(s). The analyst(s) confirms that he or she and his / her associates do not serve as directors or officers of the Company, and the Company or other third parties have not provided or agreed to provide any compensation or other benefits to the analyst(s) in connection with this report. An “associate” is defined as the spouse, parent or step-parent, or any minor child (natural or adopted) or minor step-child, of the analyst.

Services offered by CFC include products that are traded on margin and can result in losses that exceed deposits. Before deciding to trade on margin products, you should consider your investment objectives, risk tolerance and your level of experience on these products. Trading with leverage carries significant risk of losses and as such margin products are not suitable for every investor and you should ensure that you understand the risks involved and should seek independent advice from professionals or experts if necessary.