Mike's "Rule of Thumb"

Creating an appropriate allocation in a portfolio can be difficult. Aside from utilizing a risk tolerance profile there are some other methods for determining an appropriate mix of stocks and bonds for investors. One we utilize is Mike's take on the standard "Rule of Thumb" – which uses a factor of 100 minus the client's age to determine the percentage that should be invested in equities (stocks). Mike's "Rule of Thumb" takes into consideration the fact that everyone now, for the most part, is simply living longer. With our longer lives, not only will we need to provide income for a longer period of time we will also have potentially more time to grow that money. With this in mind, Mike uses a factor of 120 minus the client's age to derive the equity allocation. This guideline creates an allocation that is slightly more aggressive to facilitate faster growth accommodating the need for the longer income needs.

As an example, with a 48 year old individual  – Take 120 minus 48 and that person should have an equity (stock) allocation of at least 72% in order to maintain income well into their life expectancy. Once we have this basic information, we personalize their allocation even further taking into account the client's individual risk tolerance level (how much potential loss the person can mentally handle before selling out of the market). It is important to realize that even when a client's age dictates a certain percentage of equity they may be risk adverse and actually require a much more conservative approach.

This is where we come in as advisors, our knowledge and expertise allow us to assist the client in making sound decisions while weighing and balancing both their age and their market fluctuation tolerance level.