Should You Invest Your Entire Portfolio In Stocks? (2024)

Every so often, a well-meaning "expert" will say long-term investors should invest 100% of their portfolios in equities. Not surprisingly, this idea is most widely promulgated near the end of a long bull trend in the U.S. stock market. Below we'll stage a preemptive strike against this appealing, but potentially dangerous idea.

The Case for 100% Equities

The main argument advanced by proponents of a 100% equities strategy is simple and straightforward: In the long run, equities outperform bonds and cash; therefore, allocating your entire portfolio to stocks will maximize your returns.

Supporters of this view cite the widely used Ibbotson Associates historical data, which "proves" that stocks have generated greater returns than bonds, which in turn have generated higher returns than cash. Many investors—from experienced professionals to naive amateurs—accept these assertions without further thought.

While such statements and historical data points may be true to an extent, investors should delve a little deeper into the rationale behind,and potential ramifications of,a 100% equity strategy.

Key Takeaways

  • Some people advocate putting all of your portfolio into stocks, which, though riskier than bonds, outperform bonds in the long run.
  • This argument ignores investor psychology, which leads many people to sell stocks at the worst time—when they are down sharply.
  • Stocks are also more vulnerable to inflation and deflation than are other assets.

The Problem With 100% Equities

The oft-cited Ibbotson data is not very robust. It covers only one particular time period (1926-present day) in a single country—the U.S. Throughout history, other less-fortunate countries have had their entire public stock markets virtually disappear, generating 100% losses for investors with 100% equity allocations. Even if the future eventually brought great returns, compounded growth on $0 doesn't amount to much.

It is probably unwise to base your investment strategy on a doomsday scenario, however. So let's assume the future will look somewhat like the relatively benign past. The 100% equity prescription is still problematic because although stocks may outperform bonds and cash in the long run, you could go nearly broke in the short run.

Market Crashes

For example, let's assume you had implemented such a strategy in late 1972 and placed your entire savings into the stock market. Over the next two years, the U.S. stock marketlost more than 40% of its value. During that time, it may have been difficult to withdraw even a modest 5% a year from your savings to take care of relatively common expenses, such as purchasing a car, meeting unexpected expenses or paying a portion of your child's college tuition.

That'sbecause your life savings would have almost been cut in half in just two years.That is an unacceptable outcome for most investors and one from which it would be very tough to rebound. Keep in mind that the crash between 1973 and 1974 wasn't the most severe, considering what investors experienced in the Stock Market Crash of 1929, however unlikely that a crash of that magnitude could happen again.

Of course, proponents of all-equities argue that if investors simply stay the course, they will eventually recover those losses and earn much more than if they get in and out of the market. This, however, ignores human psychology, which leads most people get into and out of the market at precisely the wrong time, selling low and buying high. Staying the course requires ignoring prevailing "wisdom" and doing nothing in response to depressed market conditions.

Let's be honest. It can be extremely difficult for most investors to maintain an out-of-favor strategy for six months, let alone for many years.

Inflation and Deflation

Another problem with the 100% equities strategy is that it provides little or no protection against the two greatest threats to any long-term pool of money: inflation and deflation.

Inflation is a rise in general price levels that erodes the purchasing power of your portfolio. Deflation is the opposite, defined as a broad decline in prices and asset values, usually caused by a depression, severe recession, or other major economic disruptions.

Equities generally perform poorly if the economy is under siege by either of these two monsters. Even a rumored sighting can inflict significant damage to stocks. Therefore, the smart investor incorporates protection—or hedges—into his or her portfolio to guard against these two threats.

There are ways to mitigate the impact of either inflation or deflation, and they involve making the right asset allocations. Real assets—such as real estate (in certain cases), energy, infrastructure, commodities, inflation-linked bonds, and gold—could provide a good hedge against inflation. Likewise, an allocation to long-term, non-callable U.S. Treasury bonds provides the best hedge against deflation, recession, or depression.

A final word on a 100% stock strategy. If you manage money for someone other than yourself you are subject to fiduciary standards. A pillar of fiduciary care and prudence is the practice of diversification to minimize the risk of large losses. In the absence of extraordinary circ*mstances, a fiduciary is required to diversify across asset classes.

Your portfolio should be diversified across many asset classes, but it should become more conservative as you get closer to retirement.

The Bottom Line

So if 100% equities aren't the optimal solution for a long-term portfolio, what is? An equity-dominated portfolio, despite the cautionary counter-arguments above, is reasonable if you assume equities will outperform bonds and cash over most long-term periods.

However, your portfolio should be widely diversified across multiple asset classes: U.S. equities, long-term U.S. Treasuries, international equities, emerging markets debt and equities, real assets, and even junk bonds.

Age matters here, too. The closer you are to retirement, the more you should trim allocations to riskier holdings and boost those of less-volatile assets. For most people, that means moving gradually away from stocks and toward bonds. Target- date funds will do this for you more or less automatically.

If you are fortunate enough to be a qualified and accredited investor, your asset allocation should also include a healthy dose of alternative investments—venture capital, buyouts, hedge funds, and timber.

This more diverse portfolio can be expected to reduce volatility, provide some protection against inflation and deflation, and enable you to stay the course during difficult market environments—all while sacrificing little in the way of returns.

Should You Invest Your Entire Portfolio In Stocks? (2024)

FAQs

Should You Invest Your Entire Portfolio In Stocks? ›

The main argument advanced by proponents of a 100% equities strategy is simple and straightforward: In the long run, equities outperform bonds and cash; therefore, allocating your entire portfolio to stocks will maximize your returns.

How much of your portfolio should be in stocks? ›

If you wish moderate growth, keep 60% of your portfolio in stocks and 40% in cash and bonds. Finally, adopt a conservative approach, and if you want to preserve your capital rather than earn higher returns, then invest no more than 50% in stocks.

Should I invest all my money into stocks? ›

Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.

Should you invest in 100% equities? ›

New paper suggests a portfolio of 100% stocks is better, even in retirement. The paper suggests the volatility fears of relying on stocks in retirement is overrated and outweighed by their consistently higher returns over bonds. Bonds also tend to get smashed at the same time as stocks, but take way longer to recover.

How many stocks should I buy in my portfolio? ›

What's the right number of companies to invest in, even if portfolio size doesn't matter? “Studies show there's statistical significance to the rule of thumb for 20 to 30 stocks to achieve meaningful diversification,” says Aleksandr Spencer, CFA® and chief investment officer at Bogart Wealth.

Is it realistic to have 100% of your portfolio in stocks? ›

The 100% equity prescription is still problematic because although stocks may outperform bonds and cash in the long run, you could go nearly broke in the short run.

What is the 120 age rule? ›

The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.

Is investing $100 in stocks worth it? ›

On average, the stock market yields between an 8% to 12% annual return. Investing $100 per month, with an average return rate of 10%, will yield $200,000 after 30 years. Due to compound interest, your investment will yield $535,000 after 40 years. These numbers can grow exponentially with an extra $100.

Is it worth investing $500 in stocks? ›

Investing in an S&P 500 index fund is one of the most reliable ways to build wealth. Vanguard ETFs are known for extremely low fees. A $500 monthly investment could grow into $1 million over 30 years.

How to invest $100 dollars to make $1000? ›

10 best ways to turn $100 into $1,000
  1. Opening a high-yield savings account. ...
  2. Investing in stocks, bonds, crypto, and real estate. ...
  3. Online selling. ...
  4. Blogging or vlogging. ...
  5. Opening a Roth IRA. ...
  6. Freelancing and other side hustles. ...
  7. Affiliate marketing and promotion. ...
  8. Online teaching.
Apr 12, 2024

At what age should you get out of the stock market? ›

There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.

Should I stay fully invested? ›

By staying invested, you can harness the power of compound interest, which can significantly multiply your initial investments over time, giving them the potential to grow exponentially over the long term.

Should your 401k be all stocks? ›

Bottom line. “The surest way to build true long-term wealth for retirement is to invest in the stock market,” Johnson says. While you don't need to have your whole portfolio in stocks, it's important to have a sizable allocation to them so that your 401(k) can grow and support you in your retirement years.

How much money do I need to invest to make $3,000 a month? ›

Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.

How many stocks does Warren Buffett own? ›

Buffett's company Berkshire Hathaway (BRK. A, BRK.B) publicly discloses its top stock holdings quarterly, giving you a glimpse behind the curtain to see the stock portfolio of one of the world's greatest investors. Among the 47 stocks Berkshire Hathaway holds, the top 10 represent about 84% of the company's holdings.

Is 20 stocks too much? ›

An unlucky selection of 20-30 stocks can massively underperform other luckier choices over 25 years. To mitigate that risk, a long-term investor should be more aggressive in diversifying the portfolio and hold more stocks than the number suggested by a static one-period risk model.

What is a 70 30 investment strategy? ›

A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds.

What is the 5% portfolio rule? ›

The rule suggests that you should not invest more than 5% of your portfolio in a single stock. The idea behind the rule is to minimize the risk of losing a significant portion of your portfolio in case the stock performs poorly.

Is 30 stocks too many in a portfolio? ›

In How Many Stocks Make a Diversified Portfolio?, Meir Statman concluded that a well-diversified portfolio of randomly chosen stocks must include at least 30 stocks, which contradicted the earlier study and what the author suggested was a then widely accepted notion that the benefits of diversification are virtually ...

How much of your portfolio should be in company stock? ›

Concentrated positions of company stock can carry more market risk than a diversified portfolio, coupled with career risk tied to the company. Holding more than 5% to 10% of your portfolio in company stock is a level of concentration that merits attention.

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