How Your Asset Allocation Relates to Your Age

Key Takeaways

• Don't assume stocks become less risky in the long run—this is a fallacy; instead, adjust your portfolio allocation because your human capital (future earnings potential) decreases with age while your investment portfolio grows
• When young, you can allocate your entire retirement portfolio to stocks or even use leverage because your safe human capital makes up most of your total wealth; only reduce equity exposure as you age and human capital shrinks
• Calculate your total wealth as investment portfolio plus human capital (present value of future earnings), not just your current portfolio balance, to determine your true asset allocation
• The age-based rule of thumb works because your overall equity exposure through both human capital and portfolio remains constant, but the breakdown between them shifts over your lifetime