50+ Lifestyles

The Golden Investment Rule

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

Years ago, I was introduced to the Golden Investment rule and have continued to use this rule as a guideline for planning with clients. The rule is a simple calculation that serves as a guideline to determine the amount of our assets overinvested. What is over invested? That’s where I apply the Golden Investment Rule to determine the percentage of assets, we should have invested in the stock market or mutual fund market. Let’s review – the Golden Investment Rule is a “rule of thumb” strategy I learned years ago and have applied this rule of thumb for as long as I’ve been in business – which is getting to be a good number of years now! The Golden Investment Rule – simply subtract your current age from the number 100. The result of that calculation is a percentage that represents the maximum percentage of your assets that should be invested in stock and mutual funds. BECAUSE these assets – stocks and mutual funds – are subject to risk. Values in these assets may decline with stock and mutual fund market declines. Now while we are working and actively contributing to these accounts – market declines may be a benefit to us while still contributing to these retirement accounts. BUT when retired we no longer contribute to retirement plans such as 401Ks, 457 plans, IRAs, or other pension plans. When we are no long contributing to these plans – then we need to make ‘safe’ a good portion of these plans to protect them from declines in their value. How much should be protected? 1/2, 1/3, 1/4 or other amounts. How do we determine how much of these assets need to be made safe?

In my opinion – that’s where the Golden Investment Rule comes into play. What is the Golden Investment Rule….it is simply a guideline showing the maximum percentage of assets that should be invested in stocks and mutual funds. Most pensions, IRAs, 401Ks, or other qualified retirement plans are invested in our choice of several mutual funds or shares of stocks, but one thing is certain in all stock and mutual fund investments……the share price will go up and the share price will decline. Some much greater than others but none-the-less the share price fluctuates. Consequently, how much of our retirement money should be made SAFE….to protect those assets from market declines……. that’s where the Golden Investment Rule comes into play, and it is a very IMPORTANT player. Remember how it works. Again, subtract your age from 100 – the result is the maximum percentage of assets that should be exposed to risk…invested in stocks or mutual funds.

Let’s look at some examples if I am age 50 subtracted from 100 = 50%- (age 60 = 40%, age 70 = 30%, age 75 = 25%, age 80 = 20%), If we are outside of this guideline than we may be over-invested in the market and may be subjecting some of our assets to market risk.

Note – as we look at this formula – the Golden Investment Rule – a percentage of assets should always be invested in the stock and mutual fund market. Let’s go back to the Golden Investment Rule at age 50 – subtracted from 100 = 50%. No more that 50% of assets should be invested in stocks and mutual funds…. but that leaves the remainder 50% that should be invested in stocks and mutual funds. At age 50 according to the Golden Investment Rule 50% safe and 50% in stock and mutual funds to help build reserves, to guard again runaway inflation or just inflation. At age 60 from 100 = no more than 40% of assets invested in stocks and mutual funds. But where do we invest the 60% that is not in stocks and mutual funds? AND the problem continues as we go on with age – these is always a percentage of assets that should be invested in stocks and mutual funds. Even at age 80 the Golden Investment Rule says no more than 20% of assets should be invested in stocks and mutual funds. So where do we invest the 80% that should not be in stocks and mutual funds. Where is there a safe money harbor for 80% of our funds.

First of all why keep any money in stocks and mutual funds? We always, always want to keep some percentage of assets in stocks and mutual funds because that is our inflation hedge……assuming the stock and mutual fund markets continue to keep pace with inflation. The Golden Investment Rule is a guideline.

Now the question arises where to I invest when the Golden Investment Rule tells me to make safe a percentage of assets. At age 50 – the Golden Investment Rule says no more than 50% of assets in stocks and mutual funds. When do I invest the 50% for safe money? Or at age 60 where the Golden Investment Rule says no more than 40% in stocks and mutual funds. Where do I invest the 60% safe money? At age 70 – Golden Investment Rule says no more than 30% in stocks and mutual funds. Where do I invest the 70% safe money? And so on…….

Where to invest in a safe money harbor……the answer readers is the annuity…. especially the index annuity that is not invested in the market but allocated to the gains in the market…. the gains only. The index annuity is not allocated to stock and mutual fund market declines.

Note we continue our virtual monthly Community Meetings for folks turning age 65 and becoming eligible for Medicare. Note our ad this page. Next meetings are Sept 21 & Sept 23.

Richard J. Schillig, CLU, ChFC, LUTCF is an Independent Insurance and Financial Advisor with RJS and Associates, Inc. He can be reached at (563) 332-2200.