Optimal Equity Allocation in Your Portfolio

Disclaimer: Please do not consider this as an investment advice. I am not a sebi registered investment advisor.

People considering Equity investments always think about the optimal %.

How much should go into equity, and how much into fixed income? Ask ten people and you will probably hear ten different numbers, each delivered with complete confidence.

There is no universally correct answer. But a few well-known approaches can help you arrive at a number that suits you.

Approach 1: The "100 minus Age" Rule

This is the most popular rule of thumb:

Equity allocation (%) = 100 − your age

• At 30, you would hold 70% in equity and 30% in fixed income.
• At 50, you would hold 50% in equity.
• At 60, you would hold 40% in equity.

The logic is simple. When you are young, you have decades to recover from market falls, so you can take more equity risk. As retirement nears, you shift towards stability.

Many investors use 110 or 120 minus age instead, since people now live longer and need their money to last longer. A 30-year-old following the 120 rule would hold 90% in equity.

The rule is easy to remember. Its weakness is that it only looks at age. Two 30-year-olds can have very different incomes, responsibilities, and comfort with losses.

Approach 2: Goal-Based Buckets

Instead of asking "what is my overall equity percentage?", this approach asks "when do I need this money?"

Your overall equity percentage then becomes the result of your goals, not a number you pick upfront. A person saving for a house purchase in two years and for retirement in thirty years will naturally end up with a balanced overall portfolio.

You can explore the choices within each bucket in our guide to asset classes in India.

Goal-Based Buckets, Taken One Step Further: Morgan Housel

Goal-based buckets tell you what to hold for each goal. The harder part is sticking with it when markets fall, and this is where the author Morgan Housel adds a useful layer.

In the book - The Psychology of Money, he does not offer a formula for the ideal equity percentage. His point is different, and arguably more useful.

The best portfolio on paper is worthless if you abandon it during a crash. Investing success depends less on picking the mathematically perfect allocation and more on picking one you can stay with through bad years. Housel also stresses leaving a margin of safety, so that a downturn in equity does not force you to sell at the worst time.

Think of it this way: your buckets decide the equity percentage for each goal, and the margin of safety keeps your short-term bucket from ever forcing you to sell your long-term equity at a loss. Seen this way, the optimal equity allocation is not the one that maximises returns in a spreadsheet. It is the one that lets you sleep at night, keep your SIPs running when markets fall, and avoid panic decisions.

A Simple Way to Decide

1. Start with a rule of thumb such as 100 minus age as a reference point.
2. Adjust it using your goals and their timelines.
3. Ask yourself honestly: "If my equity portfolio fell 30%, would I stay invested?" If the answer is no, reduce the equity percentage until the answer is yes.

A slightly lower equity allocation that you hold for twenty years will usually beat a higher one that you abandon in year three.

Hold company stock from your job? Learn how to evaluate employee equity in our guide to Restricted Stock Units (RSUs).

Use our SIP Calculator to see how steady contributions can grow over time, whatever allocation you choose.