Investment discussions often use very simple age-based rules. One of the best known suggests subtracting your age from 100 to determine the percentage of your portfolio to allocate to equities: a 30-year-old should therefore hold around 70% in equities, and a 60-year-old 40%. More aggressive versions also exist, such as “110 minus your age” or “120 minus your age”. These formulas have the advantage of simplicity, but their limitation is equally clear: they reduce a complex decision such as asset allocation to a single demographic fact.
Age can provide useful information, particularly because a young person normally has more working years ahead and a potentially longer horizon. But two people of the same age can have completely different wealth, objectives, income and family responsibilities. The Bank of Italy and CONSOB therefore place objectives, time horizon, available resources and capacity to bear risk at the centre of financial planning, rather than an automatic age-based formula.
Why age is used
The idea behind age-based rules is not entirely irrational. In general, a young person may have more time to recover losses and more years of future income through which to continue saving and investing. Someone approaching retirement, however, may have less opportunity to rebuild wealth through work and may begin actually using accumulated capital.
This observation underpins the idea of progressively reducing exposure to more volatile instruments with age.
The problem is turning this insight into a universal formula.
Age is only a proxy, an indirect indicator of other, more important variables. What really matters is not how old we are, but how long it will be before we need to use that money.
The time horizon is the period for which capital can remain invested before being used, and portfolio composition should change according to that horizon.
Two thirty-year-olds can have completely different portfolios
Imagine two people aged 30.
The first has a stable job, an available home, an adequate emergency fund and is investing 40,000 euros that they do not expect to use for at least thirty years.
The second is the same age but is accumulating 40,000 euros needed in two years for a home deposit.
A rule based solely on age might steer both towards a high equity allocation. Financially, however, their situations are completely different.
For the first person, strong short-term volatility might be compatible with a very long horizon. For the second, a 30% loss shortly before buying the home would turn 40,000 euros into 28,000 euros and could directly jeopardise the goal.
The difference is not age. It is the capital's time horizon.
Two sixty-year-olds can also have opposite needs
Now consider two people aged 60.
The first has 300,000 euros that they must use gradually during retirement and no other significant income sources. A substantial part of that wealth must therefore be protected against the need to sell investments during steep declines.
The second has several million euros, a pension already sufficient to cover all expenses and intends to leave most of the wealth to their children in thirty or forty years.
They are formally the same age. But for part of the second person's wealth, the economic horizon is not five years: it may extend to the next generation.
Automatically applying the same equity percentage to both would therefore make little sense.
This is the fundamental limitation of rules based solely on age.
The real variable is the time horizon
Investments are generally divided into short, medium and long term, although there are no rigid boundaries. For horizons shorter than one or two years, other things being equal, a greater allocation to lower-risk instruments is preferable; longer horizons allow greater fluctuations to be endured.
In a dedicated discussion, the Bank of Italy also observes that a horizon exceeding ten years makes it more likely that an investor will experience a full financial cycle and reduces the risk of being forced to buy at the peak and sell at the trough of the same cycle.
The correct principle is therefore not: “I am young, so I must buy equities.”
It is: “Can this capital remain invested long enough for me to withstand the investment's fluctuations?”
These are two very different ways of reasoning.
Age is not the horizon of your entire wealth
Another mistake is treating all wealth as if it had a single deadline.
A person may simultaneously have:
- 10,000 euros for emergencies;
- 30,000 euros to buy a home in four years;
- 100,000 euros for retirement in thirty years.
The person has one age, but these three sums have three completely different time horizons.
Applying a single asset allocation to all wealth ignores this distinction.
A more rational approach can instead connect each portion of capital with its goal: ready availability for emergencies, greater caution for the four-year objective and greater capacity to withstand volatility for the thirty-year capital.
Age remains unchanged. The money's purpose changes.
Future income matters
Another variable often ignored by standard rules is income stability.
A 30-year-old with an extremely stable job and strong saving capacity can more easily recover a loss of wealth through future income. Someone else of the same age, with highly variable income and substantial family responsibilities, may have a much lower financial capacity for risk.
This concept is often associated with human capital, the economic value of the future ability to earn income through work.
A stable, predictable career can increase the capacity to take financial risk. Precarious employment may instead call for greater caution and liquidity.
This variable also does not appear in the “100 minus your age” formula.
Risk capacity and risk tolerance
We must also distinguish how much risk someone can afford from how much they can psychologically tolerate.
A thirty-year-old with high income, substantial wealth and a forty-year horizon may have a very high financial capacity to withstand equity fluctuations. But if a 20% loss causes panic and a decision to sell everything, an extremely aggressive portfolio may still be unsuitable.
Conversely, someone may claim to be very tolerant of losses but need the capital in two years. In that case, psychological composure does not remove the financial problem.
CONSOB specifically highlights the need to consider objectives, available resources, time horizon and risk tolerance together when defining an investor's profile.
A portfolio should therefore respect both the objective capacity to take risk and the subjective ability to tolerate it.
Total wealth changes what percentages mean
The size of wealth also radically changes the reasoning.
Suppose two people must meet 30,000 euros of expenses over the next five years.
The first has financial assets of 50,000 euros. Those 30,000 represent 60% of their wealth and require careful protection.
The second has wealth of 2 million euros. The same 30,000 euros represents just 1.5%.
Although they may be the same age, their ability to absorb volatility is completely different.
This is another reason why standard percentages applied without knowing total wealth can be largely meaningless.
Retirement does not create a clear dividing line between risk and safety
Another common simplification is assuming that, as retirement approaches, all wealth should gradually become invested extremely cautiously.
It is true that the transition from accumulation to drawing on capital changes the financial problem. Regular withdrawals may begin in retirement, and a large loss in the early years can be particularly damaging because it forces the sale of more portfolio units precisely when prices are low.
But this does not mean that all wealth must become cash or bonds on the retirement date. Someone retiring at 67 may have another twenty or thirty years ahead.
Some money will be needed immediately, some in ten years, and some may never be used directly.
Even in retirement, several time horizons therefore coexist.
Sequence of returns risk
This leads to a particularly important concept: sequence of returns risk, the risk associated with the order in which positive and negative returns occur while withdrawals are being made from a portfolio.
Suppose two retirees achieve exactly the same average return over twenty years. The first suffers the largest losses in the early retirement years; the second in the later years.
If both regularly withdraw money, the first can be much worse off because they must sell assets after steep declines, reducing the capital available to benefit from a subsequent recovery.
This is one reason why, when approaching a period of drawing on wealth, protecting at least the portion needed in the early years may become useful.
But once again, the important variable is not simply age: it is when withdrawals start and how much capital must be used.
“100 minus your age”: why it is too simple
Consider the traditional rule:
At 20: 80% equities.
At 40: 60%.
At 60: 40%.
At 80: 20%.
The formula produces a neat, intuitive progression, but ignores almost everything discussed above: income, wealth, emergency fund, housing, pension, objectives, risk tolerance, heirs and the actual investment horizon.
A 40-year-old who needs to use all their wealth in three years may not be able to afford 60% in equities. A 70-year-old with enormous wealth, high pension income and intergenerational goals could rationally hold more than 30% in equities.
At most, the rule can be used as a heuristic, a very approximate starting point for reflection, rather than a financial formula.
The broader principle that a young person should always take more risk also has limitations.
Imagine a 22-year-old student with 15,000 euros in savings, all needed for a master's degree, relocation and an advance rent payment over the next two years. Despite the investor's youth, that capital has a very short horizon.
Now imagine someone aged 55 with 500,000 euros, their own home, high income, a secure future pension and no need to use 300,000 euros for twenty years.
The second investor's long-term allocation may be able to withstand more volatility than the first person's capital.
Age alone would have suggested exactly the opposite.
Age and recovering losses
There is nevertheless a real reason why age can matter: the more working years remain, the greater the usual opportunity to continue saving and offset losses through new contributions.
A young person losing 10,000 euros may theoretically have thirty years of future income to rebuild that portion of wealth. Someone already retired does not normally have the same opportunity.
But even this statement depends on individual circumstances.
A thirty-year-old with precarious income may have less capacity to recover a loss than a sixty-year-old still professionally active and earning a high income.
Age therefore provides information, but is not sufficient.
The emergency fund comes before asset allocation
Another reason standard rules can be dangerous is that they often completely ignore emergency liquidity.
A 25-year-old might read that 80% or 90% of their wealth should be in equities and invest almost everything. If they then lose their job during a market downturn, they may be forced to sell at the worst possible moment.
Before setting the equity percentage, it would be more rational to separate capital intended for emergencies and short-term expenses.
Only money that can truly remain invested should enter the long-term asset allocation calculation.
Standard rules can still be useful
After these criticisms, it would be excessive to conclude that age-based rules are completely useless.
They can be educational tools because they introduce a valid principle: the amount of risk we can reasonably take tends to change throughout life.
The problem arises when they are used as automatic formulas.
A good simple rule should be interpreted as the beginning of a question, not the definitive answer.
Instead of saying: “I am 30, so I must hold 70% in equities”, the rule can be used to ask: “At 30, which of my goals have a long enough horizon to allow a substantial equity allocation?”
The second wording preserves the useful insight while removing rigidity.
A more rational method
A more complete approach can start with five questions.
1. When will the money be needed?
Each goal should have its own time horizon.
2. How much stable income will I continue to earn?
Future saving capacity affects the ability to recover losses.
3. How much wealth do I have, and what other resources are available?
Housing, pension income, cash and other investments change overall risk capacity.
4. How much can I financially afford to lose?
A loss must not jeopardise essential goals.
5. How much can I psychologically tolerate?
An overly aggressive strategy can lead to selling at the worst times.
Only after answering these questions does it make sense to decide how much to allocate to different asset classes.
An example
Imagine a 35-year-old with 120,000 euros.
Of this:
- 15,000 euros forms the emergency fund;
- 30,000 euros will be needed to buy a home in three years;
- 75,000 euros is intended for retirement and should not be needed for at least thirty years.
Applying “100 minus your age” to total wealth would theoretically allocate 65% of 120,000 euros, or 78,000 euros, to equities.
But this would completely ignore the fact that 45,000 euros serves short- or medium-term purposes.
A goals-based approach could instead exclude the emergency fund from equity asset allocation and offer greater protection to the home-purchase capital, while the retirement portfolio could support a much higher equity allocation.
Age has not changed. The interpretation of the wealth has.
There is no correct percentage without knowing the person
CONSOB emphasises that portfolio composition must be consistent with risk profile, objectives and time horizon. European rules on investment products also give weight to factors such as the client's risk profile, time horizon and wealth.
Setting an ideal equity percentage based solely on age is therefore not a serious approach.
Telling a twenty-year-old “you must hold 100% equities” or a seventy-year-old “you must hold almost everything in bonds” ignores much of the information needed for a financial decision.
Percentages can emerge only after the problem has been defined.
Conclusion
Age matters in investing, but much less than some standard rules suggest.
Being young often means having more time ahead, greater human capital and a greater opportunity to recover losses through future earnings. Approaching retirement often means beginning to draw on wealth and having less capacity to rebuild it through new savings.
These are important considerations.
But they are not enough.
Two people of the same age may have completely different goals, wealth and risk capacity. And the same person may simultaneously hold capital intended for objectives one, five and thirty years away.
The right question is therefore not: “How old am I, and therefore how much should I hold in equities?” but “When will I need this money, how much risk can I financially bear, and what part of my wealth can truly remain invested for the long term?”
Age can help formulate the answer.
It should not replace it.