Age and Equity allocation – A study by Vanguard

Over the last five years, we have seen an increase in investments in equity. One common question is how much equity should we hold as we grow older!! There are various theories on this which range from simplistic thumb rules (equity exposure = 100 –age (in years) to complicated asset allocation models and calculators!!

What are investors doing globally

We recently came across a very interesting study in the US. A 2018 Vanguard studyof four million investors showed how the equity allocation varies with the age of the Individual.

Let us understand this better

• The overall % of asset allocation to equity is much higher than what we expected. Equity allocation drops with age but the median still is 90% amongst the millennials (those born after 1980) and 63% for the silent generation (those born before 1945)
• The minimum age of a person from silent generation is 73 years. And the average equity holding is 63%!!  Let us look at why is there is such a high asset allocation to equity.  Probably, those in the baby boomer and silent generation have seen significant gains from equity over the past 15 years and this has encouraged them to stay on in equity irrespective of advancing age
• On the other hand, quite a few have zero equity exposure

It would be fascinating to analyze these numbers from an Indian perspective.NCAERand RBIhave done the most detailed research in this regard.

• A 2016 NCAER study showed that between 70 to 90% of the wealth in India is locked up in physical assets (real estate, durables and gold bullion)
• The interesting thing is that the asset allocation hardly seems to vary by age!! We hold 60-70% of our money in real estate and this does not reduce over time

How does this matter to us in India?

Too often our personal experience (how our equity portfolios have done for us over the last 1 or 2 years) influence our asset allocation decisions. The age of the individual or our past experience should not be the criteria to determine the level of equity exposure. More mature markets like the US are showing increased equity exposure over age and time.

As we keep emphasizing, asset allocation is a key decision which determines how we grow our wealth over time. While there are various thumb rules and calculators available, the allocation will depend on each family’s unique needs and it will also evolve over time.

Overall as Indians are making the shift from physical to financial assets like equity, an understanding of the risk adjusted returns and taking long term decisions ignoring short term fluctuations will help investor optimize their wealth and returns.