Given the stock market's healthy long-term performance, some clients may wonder whether it pays to invest 100% of their portfolios in equities.
In fact, Ben Carlson, Ritholtz Wealth Management's institutional asset management director, recently wrote on his "A Wealth of Common Sense" blog that one reader had asked about investing retirement accounts entirely in stocks. Another questioned why retirees wouldn't hang onto their equities and let them keep growing.
The questions arose after Carlson posted a chart with data from NYU showing S&P 500 annual returns over nearly a century, with up years far outnumbering down — and more than 50 years in which the index (or precursors) returned 10% or more.
Since so many financial decisions rest on a client's particular situation, it shouldn't come as a surprise that Carlson said "it depends" whether investing entirely in stocks makes sense.
"In theory, young people investing for retirement should absolutely have 100% of their portfolio invested in equities," he wrote. A best-case scenario for young investors would be the ability to put more money to work when the market slides, bringing lower prices, he added.
This scenario requires the investor to keep saving even in tough market times, according to Carlson, who suggested young people's best financial asset is their "human capital," i.e., their future earnings and savings ability.
That human capital diminishes as people age, however, "and your portfolio eventually becomes your biggest asset," he wrote.
Older investors tend to switch from a wealth accumulation to a wealth preservation mindset, incorporating cash and bonds in their portfolios, so they don't have to sell off holdings that have lost value in a bear market, from which it could take years to break even, he said.
No Universal Answer
"There is no universal answer for every investor, so it's important to think through both the upside surprises — long-term compounding gains — and the downside shocks — lengthy bear markets," noted Carlson, 41, who said his own retirement portfolio is entirely invested in equities or similar securities but that he keeps cash and short-term bond reserves.
ThinkAdvisor asked other investing experts to weigh in on the question.
Peter Mallouk, Creative Planning president and CEO, suggested some diversification makes sense despite the strong long-term track record for equities.
"Over 10 years or more, the odds are overwhelming that stocks will outperform bonds. People often overestimate the gap in income between bonds and stocks," not realizing that stocks produce some income and quality bonds don't produce that much, he said via email on Friday.
"I prefer to overweight stocks as much as possible," he added, "only retaining enough in bonds to cover needs over the next five to seven years, or for those that simply can't stomach the volatility that comes with stocks, especially if they can accomplish all their goals with a less volatile portfolio.
