Investing is littered with rules of thumb that feel reassuringly simple but consistently lead investors astray. Here we dismantle four of the most pervasive: including one hiding inside your index fund.
Simple rules are appealing. Markets are unpredictable, choices are vast, and a clean formula cuts through the noise. The problem is that every investment shortcut shares the same flaw: it reduces a deeply personal decision to a single variable, ignoring the individual circumstances that should sit at the heart of any sound strategy. Over a long investment horizon, the difference between a convenient portfolio and an appropriate one can be enormous.
1. Subtract your age from 100
This formula says the percentage of your portfolio in equities should equal 100 minus your age. A 40-year-old holds 60% shares. A 70-year-old holds 30%. The logic is intuitive: less time to recover from a fall means less risk.
But age alone is a crude proxy. Consider a 25-year-old saving for a house deposit in two years. The formula says 75% equities when capital preservation is clearly the priority. Or a 90-year-old whose fully funded lifestyle means their portfolio will ultimately pass to grandchildren with decades of investing ahead. A 10% equity allocation may be dangerously conservative.
Benjamin Graham, known as the father of value investing, offered something more useful: a floor of at least 25% in bonds or safe assets. He did not think of this as a rigid rule, but as a psychological cushion that gives investors the confidence to hold equities during downturns rather than selling in panic.
Increasing life expectancy makes this myth even more dangerous. Investors retiring today can expect two to three decades beyond retirement. A portfolio that abandons growth assets too early isn’t becoming safer. It’s slowly surrendering the returns needed to sustain purchasing power.
The reality: Age is one input among many. Timeframe, goals, income needs, and tax situation all matter. Two investors of the same age can need entirely different allocations.
2. The 60/40 portfolio is always balanced
For decades, 60% equities and 40% bonds was treated as the definitive balanced portfolio. The logic rested on a specific assumption that bonds and equities are negatively correlated: bonds rise when equities fall, cushioning the portfolio in downturns.
That is not a law of nature. It is a relationship that depends on the prevailing inflation and interest rate environment. In 2022, when inflation drove market weakness, equities and bonds fell simultaneously and substantially. The 60/40 investor had nowhere to hide. The diversification benefit that justified the allocation vanished at precisely the moment it was most needed.
Beyond that structural vulnerability, the 60/40 default fails on a more basic level: it makes no attempt to reflect the individual investor’s circumstances. Two investors with identical 60/40 portfolios may have entirely different goals, timeframes, and needs. The allocation tells you nothing about whether it’s appropriate for either of them.
The reality: The 60/40 split is a possible starting point, not a destination. The bond-equity correlation that underpins it is conditional, not permanent.
3. Equal weighting means true diversification
Some investors divide their portfolio equally across asset classes on the assumption that equal weighting is inherently fair and balanced. Six asset classes, one sixth each: surely that’s diversified?
Not necessarily. This ignores the vastly different risk characteristics of each class. An equal allocation to cash and equities does not produce equal risk. Equities carry far greater volatility and the potential for severe drawdowns. Equal weighting also makes no attempt to account for how asset classes interact with one another under different market conditions.
Diversification isn’t achieved by dividing capital evenly. It’s achieved by combining assets whose profiles genuinely complement one another, calibrated to your specific goals.
The reality: Equal weighting is a formula masquerading as a strategy.
4. Index funds are inherently safe and neutral
This is the subtlest myth: and the most dangerous, because it is so widely accepted. Low-cost, broadly diversified index funds are excellent instruments. The problem is the unexamined assumption that passive index investing is inherently prudent.
“Price is what you pay, value is what you get.” Warren Buffett
Buffett’s observation cuts directly to the flaw. Market cap-weighted indexes allocate the most capital to the companies that have already appreciated the most. The passive investor continuously and mechanically increases exposure to whatever has recently performed best, with no regard for valuation. The investor who poured money into a broad market fund at the peak of the technology boom at the end of the 1990s, or during the period of extreme mega-cap concentration in the early 2020s, was doing exactly what the return-chaser does deliberately: buying recent winners at elevated prices. Inside an index fund, that process is invisible: dressed up in the language of discipline and diversification.
This does not mean index funds should be avoided. On the contrary, they can be highly effective and cost-efficient building blocks when used thoughtfully as one component within a genuinely diversified portfolio, with their weighting adjusted to reflect prevailing valuations rather than applied mechanically regardless of price. The risk lies in passive, set-and-forget use as the entirety of a portfolio, with no consideration of what you’re paying for the underlying assets.
The reality: Index funds embed a systematic valuation bias. They are excellent tools: but tools that require judgment, not a substitute for it.
What these myths have in common
Each of these rules of thumb shares the same underlying appeal: they offer certainty in an uncertain environment, and they require no ongoing judgment. That is precisely what makes them unreliable. Sound portfolio construction is not a formula, it is a framework that must be calibrated to the individual investor’s goals, timeframe, income needs, tax situation, and genuine tolerance for risk. No shortcut can do that work.
The investors who build lasting wealth are not those who found the right formula. They are those who did the harder work of understanding their own circumstances clearly enough to build a portfolio they could hold with conviction through every condition the market delivered and had the discipline to stay the course when simple rules whispered that it was time to act.
