Asset allocation is a vital step in the portfolio construction process. We have said you need three variables to determine asset allocation, viz., time horizon for the goal, the amount needed to achieve the goal (terminal wealth) and the amount you can save monthly to get there. Let’s now address whether your asset allocation is also a function of your age.

Risk factor

Many consider age as a crucial factor in investment decision-making. The argument is that we tend to become less risky or more conservative as we age. That risk appetite gradually reduces as we age is mostly true. But should age be a factor in fixing asset allocation?

To understand this, consider two individuals, one aged 30 and the other 45, both want to buy a house 10 years hence. The asset allocation for them is a function of the same three variables- time horizon for goal, terminal wealth and monthly savings earmarked for the goal. So, age does not directly impact the asset allocation process. It could indirectly feed into your asset allocation process via aspirations. The individual who is younger may be risk-seeking and aspire for a larger house, and therefore needs larger terminal wealth. Or the individual may decide to save less for the same terminal wealth as the other. A larger terminal wealth for the same amount of savings or a lower savings amount for the same terminal wealth will both need higher allocation to equity.

Conclusion

The reason most consider age as an important factor in the asset allocation process is a popular thumb rule based on it, which is 100 minus age. Based on this rule, two individuals, both aged 30, should have 70% allocation to equity. Unfortunately, the argument does not consider the income volatility of the individuals. What if one individual has a stable income and the other has a large proportion of the income that is variable pay? Or what if one individual has stable employment and the other works in a cyclical industry in the private sector?

Also, the thumb rule does not consider that an investment earmarked to achieve a life goal has a finite time horizon. For goal-based investments (core portfolio), asset allocation is a function of the required return (called the minimum acceptable return) to achieve the goal, not your age.

(The author offers training programmes for individuals to manage their personal investments)

Published on June 21, 2026