The case against 100% stocks

One common piece of advice for young investors is to have a portfolio consisting of 100% stocks. This portfolio offers no diversification into bonds or precious metals. For older investors, this approach goes against another common philosophy of having your age in bonds or (age-20) in bonds.

I’ve personally never liked generic formulas for portfolio construction because each person’s individual situation is different. Not everyone can afford to take on the same risk levels for a number of reasons.

Let’s look at some things one might consider before choosing a 100% stock portfolio. Perhaps there the instances where a 100% stock portfolio isn’t the best idea?

I’ll preface by stating I did run 100% equities from 2005 to 2018 (in my early 20’s to mid 30’s). This was not due to an informed decision ; I simply knew very little when I began my investment journey and that was recommended to me. Luckily, I stuck with it and It paid off.

Issues with the 100% Stock Portfolio

A few issues with a 100% stock portfolio:

  • Doesn’t consider the personal emotional makeup of the investor.
  • Doesn’t consider future pensions and/or social security pay out .
  • Personal income level.
  • Net worth level.
  • Assumes “historical performance predicts future performance.”
  • There are periods when bonds beat stocks.

Personal Psychology and Emotional Makeup

Not everyone is the type of person that can see their account go down 20-50% and not sell. Some people naturally worry more than others; a risky portfolio may keep them up at night. The more apt you are to lose sleep over “paper losses”, the less you are cut out for 100% equities. 100% equities by design is high risk. The only way you can take on more risks is to start adding leverage.

There are still threads archived over on the Bogleheads forum from the 2008 Great Financial Crisis that show many people wished they had less equity exposure. They were closer to retirement and had taken on too much risk. In addition, I regularly see people on internet forums that talk about selling at a 20-30% loss. They can’t take the heat.

So, the inability of someone to handle great losses isn’t exactly a rare occurrence. One has to take personal inventory of their own emotional makeup before investing. Ask yourself, if my stocks fell 40% tomorrow what would I do? Would I panic sell at the bottom? If the idea of -40% bothers you, you might consider a different portfolio construction. I suggest running some portfolios at and looking at the max drawdowns to see what is possible.

Additional Income during Retirement

The extra income sources you’ll have after retirement can play a big role in your asset allocation. Naturally, if you have a hefty pension and a decent Social Security payment coming at retirement, then you can probably take on additional risks with your personal stock accounts. You’ll rely on this account less. However, those with less future income from such sources may want to reconsider the risks associated with 100% equities. This is forward-future looking.

Personal Income Level

If you are a high income earner with little debt and substantial savings, you can weather more paper losses than those without these luxuries. If you make less income and are trying to pay off substantial debts, then in my opinion, taking on more risks is probably not in your best interests. In short-the more earning power you have, the greater ability you have to replace any losses you may endure. This is why increasing your skills and increasing your career income is one of the best investment decisions you can make.

Net Worth Level

If you have a net worth of 4 million dollars and very few liabilities, then you probably aren’t going to flinch when your stocks go down 30%. On the other hand, if you are 40, a lower income earner, and you have only 60K saved in equities, it might pay to take some risk off. It depends on the particular situation. One of the first rules of investment-how can I preserve what I have already without unnecessary risks? There’s a balance to find for your personal situation because if you don’t take on enough risk, you could potentially never have enough for retirement.

Historical performance doesn’t predict the future

Holding 100% equities is greatly founded on the assumption that the stock markets go up over long periods of time. That, historically, 100% equities outperformed diversification. People always say the “stock market goes up.” However, there is the black swan event in the Japanese stock market or Nikkei. I won’t get into the probability of that happening again. Just know that no, equities don’t always go up. There are multiple long periods of time in history where you would have barely broke even holding stocks for a decade.

Stocks vs. Bonds

There are long periods of time where bonds outperform stocks. This doesn’t happen often, but it does happen. No one can predict the asset classes that’ll outperform at each point in time. An argument people are currently making is that the interest rates are so low that bonds won’t offer the returns they had over the last 10 years. Meanwhile, no one knows this 100%. Interest rates can start dropping next year; not to mention, regardless of what bonds will do, there’s no guarantee the stock market goes in the opposite direction.

Here are a few articles on bonds beating stocks

From 2011, bonds beat stocks over a 30 year period for the first time since 1860.

Another article on Long-term stock performance vs. bonds. Particularly, looking at the 2000 to 2020 time period.

Closing Thoughts

I think telling every person “Just throw all your money at the stock market” isn’t one founded on wisdom. As shown above, you have to take many things into consideration. This is why there are financial advisors (of which I’m not!). Otherwise, we’d set everyone up for 100% VTSAX and be done with it for the rest of their life. That can sometimes work out, but sometimes it doesn’t. When constructing your portfolio, think about your own income, your own tolerance for risks, and go from there.


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