The basic decision in asset allocation is to determine the weightage of debt and equity in a portfolio. The asset class chosen and debt equity mix depends on the age of the person and life expectancy. This article discusses the pattern of asset allocation to be followed according to one's age.

Age plays a crucial role in our lives. We know that the life of a human being can be broadly divided into four stages: Childhood, adolescence, youth and old age. In childhood and adolescence, we have more desires and we are governed by our desires, whereas in matured and older age, we have more needs and we work for fulfillment of the same. When a person is driven by his desires, he is more enthusiastic but when he works for his needs he may not be very energetic. For example, when we are young, we like to play and we play without the fear of injuring ourselves. But as we grow up, we avoid playing games and we do not like to take any risk of getting injured. This is human nature. It is now obvious that as we grow up, there is loss of energy and self- confidence.

This human behavior varies from age to age, especially one intends to make an investment. When people are young, they invest more in shares compared to debt in order to gain more returns. But as they get older, they invest more in debt and less in equity, because at that age they invest more for the fulfillment of their needs, rather than desires and when a person invests for his needs, he does not want to take any risk. This is logically true, because as person gets old, his risk tolerance level decreases. Let us see this in financial terms by an example. Suppose Mr. X, who is 30-years-old invests all his money in equity. Even if he loses this money, he has 30 more years to recover this amount (assuming that the working life is 60 years). However, if Mr. Y who is 50-years-old invests his money in equities and he losses the money it would be rather difficult for him as he has only 10 years to recover that amount. It implies that as a person grows old, he would have less time to recover his losses. That is why his risk tolerance level decreases.

The professional life of a human being can also be divided into four phases. These are: Accumulation Phase, Consolidation Phase, Spending Phase and Gifting Phase. Accumulation phase is at beginning of one's career. In this phase, investors are young and hence, invest in long term and high risk instruments.

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