Financial


Investing Can Be Complicated


But It Doesn’t Have to Be


By Nina Azwoir, First Vice President of Investments, Wintrust Wealth Management


I 38


“There is a strong link


between life expectancy


and investment time horizon,


since a portfolio only has to last long enough to


sustain a person during his or her natural life.” —Nina Azwoir


nvesting can be incredibly complicated, with hundreds of thousands of investment choices


that can be combined in nearly infinite varia- tions. The sheer number of options available— and the high stakes involved in getting decisions right—can make the process overwhelming. That is one reason why rules of thumb can be useful. They are a way of cutting through complexity and helping investors make decisions more quickly without getting bogged down in endless ques- tions about “what if” or “what is next.” These heuristics, or mental shortcuts, can help inves- tors focus on the most important steps to take without getting trapped in analysis paralysis.


Keep 100 (or 120) Minus Your Age in Stocks


For decades, investors have relied on this simple formula for basic asset allocation guidance. Using 100 as a starting point effectively means target- ing a bond weighing equivalent to your age, with the remainder in stocks. This guideline is based on the notion that younger individuals can afford to take on more investment risk because of their longer time horizons. As investors get older, their time horizons shorten, making an increasing fixed-income allocation more prudent. More recently, 120 has been showing up as a


more common starting point, partly because av- erage life expectancies have gradually increased. Before his death, Vanguard founder John Bogle advocated using 120 minus one’s age to determine equity allocations, explaining that the previous guideline came to fruition in an era of much high- er bond yields. In one of his landmark articles, one expert recommended targeting equity exposure at 128 minus one’s age as part of a comprehensive


strategy to support sustainable withdrawals. Why it works: This rule has stood the test of time partly because it is simple and intuitive.


There is a strong link between life expectancy and investment time horizon, since a portfolio only has to last long enough to sustain a person during his or her natural life (unless someone wants to set aside money for bequests after death). In practice, investors implementing this rule would start out with hefty equity allocations that gradually glide down as they get older. Linking portfolio alloca- tions to age might lessen the temptation to engage in market-timing (making dramatic allocation shifts in response to market moves). It also indi- rectly reinforces portfolio rebalancing, as keeping allocation in line with an age-based target would require pruning back equities after significant


gains or adding to them after market corrections. Limitations: Now that bond yields are even


lower, fixed-income allocations are likely to gen- erate lower total returns than in the past. That argues in favor of increasing savings, decreasing planned spending, or increasing equity exposure to boost long-term returns. In addition, the age-based guideline may not be


optimal for investors who are either just starting out or approaching the end of life. A 25-year old investor with decades left until retirement does not necessarily need any fixed-income exposure as part of a core retirement portfolio, assuming she already has an emergency fund and is willing to take on the higher risk inherent in an all-equity portfolio. On the other end of the age spectrum, some experts have argued that while a lower equity allocation in the years leading up to and immediately following retirement can mitigate sequence-of-returns risk, older retirees might consider gradually increasing their equity exposure over time.


SPRING 2021


ESSENTIAL Naples


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