How you allocate your assets between equity and debt is one of the most important decisions you’ll make when investing. In addition to being riskier, equity investments, such as stocks, offer higher returns. Compared to equity investments, bonds offer a lower return but a lower level of risk.
What’s the ideal equity-to-debt allocation for you? Depending on your personal circumstances and risk tolerance, that will differ. However, you can make an informed decision following some general guidelines.
Equity 101
An equity investment is a form of ownership in a specific company. In essence, you are buying a small piece of the company when you purchase a stock.
If the company does well, your stock value will rise. As such, you can sell it at a profit. In the event that the company performs poorly, though, the value of your stock might decline. Consequently, you might lose money.
Over the long term, equity investments can provide higher returns than debt investments. However, they are also more risky. It is always possible to lose money when you invest in stocks due to their short-term volatility.
Pros:
Over time, higher returns are possible.
Potential for long-term growth.
Capital appreciation potential.
Dividends and interest income are potential sources of income.
Cons:
Investing in equity is more risky than investing in debt.
It is possible for prices to fluctuate more volatilely.
Illiquidity.
It is possible to lose money.
Debt 101
A debt investment is a loan you give to a company or government. Bonds, for instance, are essentially loans between buyers and sellers. Over a set period of time, the issuer will repay the principal and interest on the bond.
The most common examples of these fixed-income investments are treasury bills, commercial papers, certificates of deposit, corporate bonds, and government bonds.
While debt investments are less risky than equity investments, they offer lower returns. Stocks are more volatile than bonds, so you have a lower risk of losing money if you invest in them.
Pros:
Investing in bonds is less risky than investing in equity.
In making your decision, you should consider the following factors:
Age.Younger investors can afford to take on more risk because they have more time to ride out market volatility. Due to less recovery time from losses, older investors may choose less risky assets.
Income. Taking on more risk may be easier if you earn a high income. On the other hand, low-income investors may want to invest in assets with less risk.
Risk tolerance. What is your comfort level with risk? In the case of risk-averse investors, conservative assets might be a better choice. However, investing in more aggressive assets may be a good idea if you are more comfortable with risk.
Equity-Debt-Allocation Based on the “100 Minus Age” Rule
In asset allocation, your investments are divided among different asset classes, such as stocks, bonds, and cash. To determine the percentage of your portfolio that should be allocated to stocks, subtract your age from 100. For example, a 30-year-old should allocate 70% to stocks and 30% to bonds.
What is the rationale behind 100 minus age? The younger the investor, the more time they have to recover from losses. Therefore, the younger investor can afford a bigger risk. By allocating more of their portfolio to bonds as they age, investors can reduce their risk exposure and recover from losses faster.
You could follow these general guidelines:
Young investors. 70% equity, 30% debt
Middle-aged investors. 60% equity, 40% debt
Older investors. 50% equity, 50% debt
It is important to keep in mind that the 100 minus age rule is only a guideline. You may need to adjust your asset allocation based on your individual circumstances.
For instance, you may feel comfortable with a higher stock allocation if you have a high-paying job and won’t retire for many years. On the flip side, if you plan to retire early from a low-paying job, you may want to increase your bond allocation.
As part of an investment strategy, asset allocation is just one component. Investing decisions should also take into account your risk tolerance, time horizon, and financial goals.
Among the pros and cons of the 100-minus-age rule are:
Pros:
It is simple and easy to remember.
Assists in determining asset allocation.
Adaptable to individual needs.
Cons:
Investors’ risk tolerance and financial goals are not taken into account.
Not suitable for all investors.
Some investors may find it too simplistic.
In addition to these asset allocation guidelines, you may wish to consider the following:
The rule of 110. According to this rule, you should allocate stocks a percentage of your portfolio based on your age subtracted from 110.
Asset allocation is based on age. Using this approach, your portfolio is allocated according to your age and risk tolerance. The portfolio of a 30-year-old investor with a high-risk tolerance might contain 80% stocks and 20% bonds.
The target-date fund. In this type of mutual fund, assets are automatically allocated as you get closer to retirement.
It is important to note that these are just general guidelines. Financial advisors can assist you in determining your right allocation.
How to Rebalance Your Portfolio
You may drift away from your target asset allocation over time. You may experience this due to market fluctuations or a change in your circumstances. To ensure your portfolio remains aligned with your goals, you should rebalance it periodically.
Investing in assets that underperformed can be rebalanced by selling those that outperformed. By doing so, you will be able to keep your portfolio balanced and reduce your risk.
To rebalance your portfolio, follow these steps:
Determine your asset allocation. Ideally, your portfolio should include a mix of stocks, bonds, and cash. Investing goals and risk tolerance will determine your asset allocation.
Track your portfolio’s asset allocation. You may find that your portfolio’s asset allocation drifts away from your target asset allocation over time. The reason for this is that individual investment prices fluctuate.
Rebalance your portfolio when it gets out of balance. Rebalancing your portfolio can be done in two ways:
Sell high-performing investments and buy low-performing investments. As a result, you will achieve your target asset allocation for your portfolio.
Contribute new money to your portfolio in a strategic way. It may be a good idea to devote all your new money to your underweighted asset classes until you have a more balanced portfolio.
Regularly rebalance your portfolio. Keeping track of your risk tolerance and asset allocation will help you remain on track.
The following tips will help you rebalance your portfolio:
Set a rebalancing schedule and stick to it. Maintaining discipline and avoiding emotional investment decisions will help you avoid making poor investments.
Use a target-date fund or other automated rebalancing service. You can easily and conveniently rebalance your portfolio this way.
Don’t be afraid to sell winners. When investments are performing well, it can be tempting to hold onto them. But, it may be time to rebalance your portfolio if these investments have taken up too much of your portfolio.
Consider using tax-advantaged accounts for rebalancing. You may have to pay capital gains taxes if you sell investments in a taxable account. A tax-advantaged account, such as an IRA or 401(k), can help you avoid this problem.
Rebalance your portfolio after large investments or withdrawals. You will be able to maintain an asset allocation that is aligned with your investment goals and risk tolerance.
Rebalance gradually. Your portfolio doesn’t need to be rebalanced all at once. It is possible to gradually rebalance your portfolio by selling some overweight assets and buying some underweight assets.
To achieve long-term success, it is important to rebalance your portfolio periodically. This helps you stay on track with your investment goals and risk tolerance.
Conclusion
A well-diversified portfolio should include both equity and debt. Based on your personal circumstances and risk tolerance, you will need to determine the ideal equity-to-debt allocation for you. When allocating your assets, you should carefully consider these factors.
Additionally, asset allocation is not a static strategy. Your asset allocation may need to be adjusted as your financial goals and risk tolerance change.
Finally, you can develop an asset allocation strategy that’s right for you by working with a financial advisor. You can work with an advisor to determine your investment time horizon, risk tolerance, and financial goals. In addition, they can guide you in choosing the right mix of equity and debt investments.
FAQs
What is equity?
Investing in equity means owning a part of the company. In other words, the stock you buy represents a portion of the company. An equity investment can yield higher returns than a debt investment but is also more risky.
What is debt?
A loan that must be repaid with interest is called a debt. By investing in debt, you are lending money to companies or governments. Debt investments are less risky than equity investments, but their returns tend to be lower.
How do equity and debt allocations differ?
Investing in equity securities, such as stocks, is a percentage of your overall portfolio. An investment portfolio‘s debt allocation refers to its percentage allocated to debt securities, such as bonds.
How do you decide how much to allocate to equity and debt?
In response to this question, there is no one-size-fits-all solution. Your investment goals, risk tolerance, and age will determine the best equity and debt allocation for you.
What are some factors to consider when making an equity vs. debt allocation decision?
An equity vs. debt allocation decision needs to take into account the following factors:
Age. To reduce your risk, you may want to allocate more of your portfolio to debt than equity as you age.
Risk tolerance. For risk-averse investors, debt may be better than equity in their portfolio.
Investment goals. You may want to allocate more of your portfolio to equity to achieve higher long-term returns.
Current economic climate. The current economic climate also influences equity vs. debt allocation decisions. For instance, allocating more of your investment portfolio to equity may be a good idea if the economy is doing well.
How often should you rebalance your equity vs. debt allocation?
Investing in equity and debt should be rebalanced regularly, once or twice a year. By doing so, your portfolio will remain aligned with your risk tolerance and investment objectives.
London-based fintech startup Kennek has raised $12.5 million in seed funding to expand its lending operating system.
According to an Oct. 10 tech.eu report, the round was led by HV Capital and included participation from Dutch Founders Fund, AlbionVC, FFVC, Plug & Play Ventures, and Syndicate One. Kennek offers software-as-a-service tools to help non-bank lenders streamline their operations using open banking, open finance, and payments.
The platform aims to automate time-consuming manual tasks and consolidate fragmented data to simplify lending. Xavier De Pauw, founder of Kennek said:
“Until kennek, lenders had to devote countless hours to menial operational tasks and deal with jumbled and hard-coded data – which makes every other part of lending a headache. As former lenders ourselves, we lived and breathed these frustrations, and built kennek to make them a thing of the past.”
The company said the latest funding round was oversubscribed and closed quickly despite the challenging fundraising environment. The new capital will be used to expand Kennek’s engineering team and strengthen its market position in the UK while exploring expansion into other European markets. Barbod Namini, Partner at lead investor HV Capital, commented on the investment:
“Kennek has developed an ambitious and genuinely unique proposition which we think can be the foundation of the entire alternative lending space. […] It is a complicated market and a solution that brings together all information and stakeholders onto a single platform is highly compelling for both lenders & the ecosystem as a whole.”
The fintech lending space has grown rapidly in recent years, but many lenders still rely on legacy systems and manual processes that limit efficiency and scalability. Kennek aims to leverage open banking and data integration to provide lenders with a more streamlined, automated lending experience.
The seed funding will allow the London-based startup to continue developing its platform and expanding its team to meet demand from non-bank lenders looking to digitize operations. Kennek’s focus on the UK and Europe also comes amid rising adoption of open banking and open finance in the regions.
Featured Image Credit: Photo from Kennek.io; Thank you!
Radek Zielinski
Radek Zielinski is an experienced technology and financial journalist with a passion for cybersecurity and futurology.
As excitement around generative AI grows, Fortune 500 companies, including Goldman Sachs, are carefully examining the possible applications of this technology. A recent survey of U.S. executives indicated that 60% believe generative AI will substantially impact their businesses in the long term. However, they anticipate a one to two-year timeframe before implementing their initial solutions. This optimism stems from the potential of generative AI to revolutionize various aspects of businesses, from enhancing customer experiences to optimizing internal processes. In the short term, companies will likely focus on pilot projects and experimentation, gradually integrating generative AI into their operations as they witness its positive influence on efficiency and profitability.
Goldman Sachs’ Cautious Approach to Implementing Generative AI
In a recent interview, Goldman Sachs CIO Marco Argenti revealed that the firm has not yet implemented any generative AI use cases. Instead, the company focuses on experimentation and setting high standards before adopting the technology. Argenti recognized the desire for outcomes in areas like developer and operational efficiency but emphasized ensuring precision before putting experimental AI use cases into production.
According to Argenti, striking the right balance between driving innovation and maintaining accuracy is crucial for successfully integrating generative AI within the firm. Goldman Sachs intends to continue exploring this emerging technology’s potential benefits and applications while diligently assessing risks to ensure it meets the company’s stringent quality standards.
One possible application for Goldman Sachs is in software development, where the company has observed a 20-40% productivity increase during its trials. The goal is for 1,000 developers to utilize generative AI tools by year’s end. However, Argenti emphasized that a well-defined expectation of return on investment is necessary before fully integrating generative AI into production.
To achieve this, the company plans to implement a systematic and strategic approach to adopting generative AI, ensuring that it complements and enhances the skills of its developers. Additionally, Goldman Sachs intends to evaluate the long-term impact of generative AI on their software development processes and the overall quality of the applications being developed.
Goldman Sachs’ approach to AI implementation goes beyond merely executing models. The firm has created a platform encompassing technical, legal, and compliance assessments to filter out improper content and keep track of all interactions. This comprehensive system ensures seamless integration of artificial intelligence in operations while adhering to regulatory standards and maintaining client confidentiality. Moreover, the platform continuously improves and adapts its algorithms, allowing Goldman Sachs to stay at the forefront of technology and offer its clients the most efficient and secure services.
Featured Image Credit: Photo by Google DeepMind; Pexels; Thank you!
Deanna Ritchie
Managing Editor at ReadWrite
Deanna is the Managing Editor at ReadWrite. Previously she worked as the Editor in Chief for Startup Grind and has over 20+ years of experience in content management and content development.
As Web3 companies increasingly consider leaving the United States due to regulatory ambiguity, the United Kingdom must simplify its cryptocurrency regulations to attract these businesses. The conservative think tank Policy Exchange recently released a report detailing ten suggestions for improving Web3 regulation in the country. Among the recommendations are reducing liability for token holders in decentralized autonomous organizations (DAOs) and encouraging the Financial Conduct Authority (FCA) to adopt alternative Know Your Customer (KYC) methodologies, such as digital identities and blockchain analytics tools. These suggestions aim to position the UK as a hub for Web3 innovation and attract blockchain-based businesses looking for a more conducive regulatory environment.
Streamlining Cryptocurrency Regulations for Innovation
To make it easier for emerging Web3 companies to navigate existing legal frameworks and contribute to the UK’s digital economy growth, the government must streamline cryptocurrency regulations and adopt forward-looking approaches. By making the regulatory landscape clear and straightforward, the UK can create an environment that fosters innovation, growth, and competitiveness in the global fintech industry.
The Policy Exchange report also recommends not weakening self-hosted wallets or treating proof-of-stake (PoS) services as financial services. This approach aims to protect the fundamental principles of decentralization and user autonomy while strongly emphasizing security and regulatory compliance. By doing so, the UK can nurture an environment that encourages innovation and the continued growth of blockchain technology.
Despite recent strict measures by UK authorities, such as His Majesty’s Treasury and the FCA, toward the digital assets sector, the proposed changes in the Policy Exchange report strive to make the UK a more attractive location for Web3 enterprises. By adopting these suggestions, the UK can demonstrate its commitment to fostering innovation in the rapidly evolving blockchain and cryptocurrency industries while ensuring a robust and transparent regulatory environment.
The ongoing uncertainty surrounding cryptocurrency regulations in various countries has prompted Web3 companies to explore alternative jurisdictions with more precise legal frameworks. As the United States grapples with regulatory ambiguity, the United Kingdom can position itself as a hub for Web3 innovation by simplifying and streamlining its cryptocurrency regulations.
Featured Image Credit: Photo by Jonathan Borba; Pexels; Thank you!
Deanna Ritchie
Managing Editor at ReadWrite
Deanna is the Managing Editor at ReadWrite. Previously she worked as the Editor in Chief for Startup Grind and has over 20+ years of experience in content management and content development.
