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Clothing isn’t usually one-size-fits-all and investing isn’t designed to be that way either. Instead, it’s about molding your portfolio to various factors, including your age, life milestones, risk tolerance and goals — similar to how you select clothes based on your personal style.

Traditional rules of thumb can be helpful in building a portfolio, but you shouldn’t solely rely on them. To have a successful investing strategy that aligns your asset allocation with your age, you need to look beyond a simple formula.

What is age-based asset allocation?

You can think of asset allocation kind of like sorting your laundry… but for your investments. Instead of piles for lights, darks and delicates, you have separate “piles” for stocks, bonds, cryptocurrency, real estate investments, and so on inside your portfolio.

But what is asset allocation by age? Simply that you’re basing your portfolio’s asset allocation on how old you are. Traditionally, you may have a riskier asset allocation when you’re younger and shift it to a more conservative investment strategy as you near retirement age (and need to tap your investments for income).

To determine your age-based allocation, you might’ve heard of the Rule of 100, where you subtract your age from 100. The answer suggests how much of your portfolio should be held in stocks.

Let’s look at an example:

An example of the rule of 100. Say you’re 40 years old. You’d put 60% (100 minus 40) of your asset allocation to stocks and the remaining 40% in bonds or other more conservative investments.

Simple, yes. But the best way to choose your asset allocation? Well, not necessarily.

Why the Rule of 100 Doesn’t Always Work

The main flaw of the Rule of 100? It may not help strike a balance between your risk tolerance and risk capacity, leaving you without enough money for retirement.

Your tolerance is the amount of risk you’re comfortable taking, and capacity is the amount of risk you need to take to reach your investment goals. You need to take both into account to pursue your investing goals. This is particularly important since, over time, people are living longer and will likely need more money in retirement.

Instead, you might try the Rule of 110 or even the Rule of 120 instead. Both account for longer life expectancies and provide more time to grow your wealth. Just subtract your age from 110 or 120 to determine the percentage of your portfolio that should be invested in stocks.

Pursuing Your Investment Goals While Balancing Risk

Age-based asset allocation makes certain assumptions about various ages and life stages.

If you’re in your 20s or 30s, it’s generally assumed that you can take more risk because you have a longer time horizon to recover from market ups and downs.

Someone who’s in their 40s or 50s may be ready to cut back on risk as they approach retirement. And if you are 65+, you may need income from your investments, instead of growth, so you may invest even more conservatively.

Along with your age, it’s important to consider the following when determining your asset allocation:

  • Your overall retirement savings goal
  • How income fluctuations can affect your ability to invest
  • Changing financial responsibilities, such as buying a home, starting a family or saving for college
  • Other sources of income you may be able to draw on, including Social Security retirement benefits or an annuity
  • Market volatility

You can’t control a market correction or a restructuring at your company that puts you out of work temporarily. But you can take steps to prepare your portfolio for those types of events.

For example, balancing out growth stocks with Treasury Inflation-Protected Securities (TIPS) or real estate can help you diversify your asset allocation to manage risk. Investing in both a 401(k) and an IRA (Individual Retirement Account) means you can continue investing even through a job change.

How to Adjust Your Asset Allocation

Asset allocation isn’t set-it-and-forget-it. How often you check in on your portfolio is up to you, but a yearly assessment is a good place to start. Review your entire financial picture, looking for factors that have changed and examine your portfolio’s performance.

If you’re veering off-course or falling short of your goals, you might need to rebalance your portfolio to bring it back in line with your target asset allocation.

Using a robo-advisor, like our Robo Portfolios, can make asset allocation easier. It takes into account your investment goals and builds a portfolio balancing risk and return in a way that you’re comfortable with. Plus, it offers fee-free rebalancing, so your asset allocation remains where you want it.

Finding the Right Allocation for Your Age

Tossing all your laundry into the washer together is risky unless you’re okay with your white socks coming out a different color. It can be just as risky to lump all your assets together without understanding how they may be used to build wealth now and as you get older. Finding the right asset allocation by age isn’t an exact science, but the more you take your age, life events, risk tolerance and goals into consideration, the easier it is to build a portfolio that’s designed to grow and change with you over time.

We do the allocation work, so you don’t have to.

Visit Ally Invest’s Robo Portfolios