The Financial Planning Rule of Thumb

We’ve all been suckered into participating in a magic trick before.

My favorite starts like this: “Pick a number… any number.”

It continues: “Now double that number… then divide it by 7… then add 3…”

You get the point… after a long string of commands and calculations, your original number is guessed.

Oddly, an exercise in portfolio asset allocation sounds quite similar. The financial planning rule of thumb is to start at 100 (or 120… but that’s debatable). Then you subtract your age. The number you arrive at is the percentage of your portfolio that you should invest in stocks. With the rest of your portfolio, you should invest in bonds.

For example, say you’re 40 years old. How much of your portfolio should you invest in stocks and how much in bonds? To find out, the equation looks like this:

120 (starting number) – 40 (your age) = 80 (% of portfolio invested in stocks)

So, in this example, you should invest 80% of your portfolio in stocks and 20% in bonds.

However, for our purposes, the math is irrelevant… other than for amusement. The point is, as you age, you should gradually shift your investment dollars out of stocks and into bonds.

As Rodney pointed out, Baby Boomers are preparing for retirement. Naturally, they’re readjusting their portfolios – both in reaction to the new economic environment and in preparation for their new goals and needs.

A recent report from Deutsche Bank confirms the flow of funds into stocks since 2009, when Baby Boomers’ spending peaked, is seriously lagging behind the trend…

Meanwhile, money is flowing into bonds like never before…


Of course there are many factors at play here. Bonds have also benefited from “safe haven” inflows and a near permanent bid from the Fed. But those influences are temporary.

The demographic trend of Baby Boomers shifting portfolio allocations will persist for many years.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.