Stock Allocation Rule: 120 Minus Age
120 minus your age is how much of your investment portfolio you should have invested in stocks, that’s what the old adage says anyway. So, with the advent of all these target retirement/lifecycle funds, we can now compare how the professionals allocate assets in an easy and transparent way. Since target retirement type funds are still pretty new and everyone is still trying to get their asset mix correct, it’s interesting to see how different brokerages differ in their offerings.
Process: What I’ve done is taken the target retirement and lifecycle funds at Vanguard, Fidelity, and T. Rowe Price and compared them against the “120 minus age” rule to see how they differed. I assume that the year is 2006, assume retirement is at 65, and extrapolate the stock percentage as 120 minus age, which I extrapolate. For example, given Vanguard’s Target Retirement 2040, I’ll assume that the current age of an investor is 25, for a recommended allocation of 95% (120 - 25) compared to an actual allocation of 87.72%, a deviation of -7.28%.
The numbers will follow but here are some takeaways (I didn’t do any statistical analysis, this is just me eyeballing numbers and drawing conclusions that are probably not statistically significant):
- The rule of thumb is certainly good in terms of rules of thumb, I wouldn’t follow it to the ends o f the Earth but it’s definitely better than nothing.
- None of the three seem to follow the rule with any sort of consistency but they are all in the ballpark of the rule, but not by much.
- Of the three, Vanguard is the closest to following the rule with T. Rowe Price between somewhat more aggressive and Fidelity being somewhat more conservative.
- What’s interesting is that all three brokerages are more conservative than the rule recommends on the fringes, than they are in the “middle” of your career. Vanguard is more conservative than the rule on the fringes (in retirement, far from retirement) and more aggressive than the rule in the middle (9-15 years away from retirement). Fidelity is just basically more conservative than the rule across the board but even more conservative in the fringes. T. Rowe finds itself more aggressive than the rule across the board but ratchets back that aggressiveness if you’re in or far from retirement.
- Matt adds this excellent point (from comments below) that I didn’t even consider: “People in their 20s and 30s are generally laid-back about retirement, and unlikely to be worried about about a point or two here or there on their return rate. People in their 60s and up are beyond the point where greater returns will help them much. It’s the 40s and 50s folks that are (in many cases, justifiably) panicking about how much they’ve under-saved, and feeling a desperate need for higher returns to help their late-coming contributions make up for lost time. A fund targeted at people in this age bracket will sell better if it overinvests in stocks, relative to the conventional wisdom.”
Numbers after the jump.
| Fund Name | Current Age |
Rule Stock % |
Actual Stock % |
Difference |
|---|---|---|---|---|
| Vanguard Tgt. Retirement 2005 | 66 | 54% | 46.98% | -7.02% |
| Vanguard Tgt. Retirement 2010 | 61 | 59% | 54.57% | -4.43% |
| Vanguard Tgt. Retirement 2015 | 56 | 64% | 65.16% | +1.16% |
| Vanguard Tgt. Retirement 2020 | 51 | 69% | 69.87% | +0.87% |
| Vanguard Tgt. Retirement 2030 | 41 | 79% | 83.82% | +4.82% |
| Vanguard Tgt. Retirement 2040 | 31 | 89% | 87.72% | -1.28% |
| Vanguard Tgt. Retirement 2045 | 26 | 94% | 88.66% | -5.34% |
| Vanguard Tgt. Retirement 2050 | 21 | 99% | 86.80% | -12.2% |
| Fund Name | Current Age |
Rule Stock % |
Actual Stock % |
Difference |
|---|---|---|---|---|
| Fidelity Freedom 2000 | 71 | 49% | 27.42% | -21.58% |
| Fidelity Freedom 2005 | 66 | 54% | 48.44% | -5.56% |
| Fidelity Freedom 2010 | 61 | 59% | 49.49% | -9.51% |
| Fidelity Freedom 2015 | 56 | 64% | 57.86% | -6.14% |
| Fidelity Freedom 2025 | 46 | 74% | 70.94% | -3.06% |
| Fidelity Freedom 2030 | 41 | 79% | 80.98% | +1.98% |
| Fidelity Freedom 2035 | 36 | 84% | 81.41% | -2.59% |
| Fidelity Freedom 2040 | 31 | 89% | 83.56 | -5.44% |
| Fidelity Freedom 2045 | 26 | 94% | 86.93% | -7.07% |
| Fund Name | Current Age |
Rule Stock % |
Actual Stock % |
Difference |
|---|---|---|---|---|
| T. Rowe Price Retirement 2005 | 66 | 54% | 54.14% | +0.14% |
| T. Rowe Price Retirement 2010 | 61 | 59% | 63.45% | +4.45% |
| T. Rowe Price Retirement 2015 | 56 | 64% | 70.41% | +5.59% |
| T. Rowe Price Retirement 2020 | 51 | 69% | 77.21% | +8.21% |
| T. Rowe Price Retirement 2025 | 46 | 74% | 82.88% | +8.88% |
| T. Rowe Price Retirement 2030 | 41 | 79% | 87.64% | +8.64% |
| T. Rowe Price Retirement 2035 | 36 | 84% | 89.09% | +5.09% |
| T. Rowe Price Retirement 2040 | 31 | 89% | 89.01% | +0.01% |
| T. Rowe Price Retirement 2045 | 26 | 94% | 88.86% | -5.14% |
Anyone see anything I missed or have any other insights or thoughts on these retirement type funds?
15 responses to “Stock Allocation Rule: 120 Minus Age”
doogan responds:
Posted: January 3rd, 2007 at 10:35 pm
you missed the fidelity 2040. could you add that? my wife and i are both 30 and both have roth iras. i have fidelity 2040 and she has t rowe 2040. i’m always concerned whether we are doing the right thing or not. does anyone have any thoughts on if the target funds are worth it compared to just picking your own diverse set of funds? does anyone have any opinions on the 3 funds listed?
jim says in reply:
Posted: January 3rd, 2007 at 10:55 pm
I just added the Fidelity Freedom 2040 Fund. I think that a target retirement fund is a good idea, I think it’s a tossup between a target retirement and an index fund but I’m also very young so I should have a lot in stocks anyway. I think that a target fund is better than picking your own mix because you get automatic rebalancing and you can be confident in that you have a pretty good mix (since they’re picking it).
A target retirement fund is generally a fund of funds - though you don’t pay more than if you picked the funds yourself.
Matt responds:
Posted: January 4th, 2007 at 2:50 am
This is exactly what I’d expect. The rule of thumb isn’t universally applicable, and someone already retired or imminently retiring will rationally have a lower risk tolerance with their retirement savings than 120-age implies. The rule is more applicable to the younger years than these breakdowns would imply, but following it strictly, in a single fund targeted at people in their 20s would still result in underdiversification of that fund.
Moreover, it makes demographic sense. People in their 20s and 30s are generally laid-back about retirement, and unlikely to be worried about about a point or two here or there on their return rate. People in their 60s and up are beyond the point where greater returns will help them much. It’s the 40s and 50s folks that are (in many cases, justifiably) panicking about how much they’ve under-saved, and feeling a desperate need for higher returns to help their late-coming contributions make up for lost time. A fund targeted at people in this age bracket will sell better if it overinvests in stocks, relative to the conventional wisdom.
Quarter Life Blog » Blog Archive » Roth IRA over $10K responds:
Posted: January 4th, 2007 at 9:48 am
[...] Blueprint recently looked at the rule of thumb for stock investments compared to your age here. The rule of thumb is 120 - your age. My ideal allocation would have 94% stocks, so it seems that I’m underinvested in stocks. I’d rather get the balances of each fund over $5,000 first so that I’m not paying a yearly maintenance fee. Then I can decide to add more funds to my portfolio. [...]
TMT responds:
Posted: January 4th, 2007 at 6:03 pm
Beware of multiple layers of fees with target and/or lifestyle funds.
Fortunately, it looks like the SEC is keeping an eye on this per my recent post:
http://www.moneytortoise.com/more-transparency-for-funds-of-funds/
Also, while I think its very controversial and have gotten into heated debates with clients over this, I would argue that you should always have most if not all of your money in a diversified portfolio of stocks, regardless of your age.
Bonds reduce short-term volatility, but they also dampen long-term returns. If you’re truly a long-term investor, and especially if you want to leave a legacy behind to your children/grandchildren/charity, I think bonds do more harm than good.
Welcome To The Carnival Of Investing For January 8, 2007 » Personal Finance - Save Money at Binary Dollar responds:
Posted: January 8th, 2007 at 9:33 am
[...] Stock Allocation Rule: 120 Minus Age posted at Blueprint for Financial Prosperity. [...]
Miller responds:
Posted: January 8th, 2007 at 10:50 am
Very interesting post. My question is… how do we really interpret this? What’s the pull away?
I’d suggest this. I think it says more about the accuracy of the rule than the target retirement funds. For example, while I don’t claim to be an expert with data to back up ANYTHING, from what I’ve heard, anything about 85% stock is maybe riskier than should ever be taken. And that’s where this rule seems to break down across the board, right? For the retirement year of 2045, the rule says 94% stock… but none of the funds have above 88.6%.
Jim, why not through these percentages into a simple excel spread sheet? I think that would convey the data the best! I’ll do it if you want because I’m actually interested! =)
Also, something caught my eye… T. Rowe Price 2035 is HIGHER stock than T. Rowe Price 2045… Who’s charging me ridiculous expense ratios to run these funds anyway??? =P (maybe the international stock exposure explains this seeming consistency…)
Good article!
My Pocket Change » BFP Follow Up: (120 minus Age) Stock Allocation Rule responds:
Posted: January 8th, 2007 at 9:55 pm
[...] Jim of Bargaineering ran interesting post examing those new target retirement year funds that many financial companies are offering. I suggested plotting his data in the comments. So with his permission, here we are! Read his post and the comments — there are lots of good thoughts. [...]
Miller responds:
Posted: January 8th, 2007 at 10:00 pm
As I suggested in my above comment and with Jim’s permission, here is a plot of the data.
http://www.mypocketchange.com/2007/01/08/bfp-follow-up-120-minus-age-stock-allocation-rule/
I think it’s a little easier to compare the numbers. For example, clearly T. Rowe Price is the most aggressive. Also, the rule seems pretty accurate, except at the edges. In retirement, allocations appear more conservative than the rule suggests, and in the early years, the rule is too aggressive…
Will responds:
Posted: January 8th, 2007 at 11:45 pm
It’s worth noting that as you approach retirement the Vanguard Target Retirement Funds hold an increasing proportion of funds in inflation-protected bonds (specifically, TIPS). If you argue that TIPS are somewhat stock-like, because they both provide some protection against inflation, then the Vanguard Funds look less “conservative” near retirement.
» Ten Things Your 401K Provider Won’t Tell You, Part 1 on My Retirement Blog responds:
Posted: March 22nd, 2007 at 4:51 pm
[...] which hopefully reduces the problem. There isn’t event agreement on allocation, I did a review of target retirement funds and found the allocations were all over the [...]
How Should I Invest Some Extra Cash: Time To Get Into Bonds? » Silicon Valley Blog About Money responds:
Posted: June 7th, 2007 at 10:49 am
[...] other advice may peg that allocation as lower by using the number 120, instead of a 100. I didn’t have to look far to find [...]
Which Investments Are Best for a Roth IRA? ∞ Get Rich Slowly responds:
Posted: June 21st, 2007 at 12:02 pm
[...] at Blueprint for Financial Prosperity looked at the Stock allocation rule: 120 minus age and also compared the asset allocations of life-cycle [...]
» Flaws of Target Retirement and Lifecycle Mutual Funds on My Retirement Blog responds:
Posted: August 13th, 2007 at 5:33 pm
[...] that you should have 120 minus your age as a percentage of stocks in your portfolio, I compared the asset allocations of many popular target retirement and lifecycle funds to see how they differed and how closely they followed the “120 minus age” rule. As you [...]
What To Do When Your Retirement Assets Fall 20% :: My Retirement Blog responds:
Posted: March 20th, 2008 at 6:59 am
[...] fall significantly hurt you? If so, your asset allocation is probably out of whack. I know the asset allocation rule is 120 minus your age but that’s a rule of thumb and your thumb is probably a little shorter if the stock market [...]