I'm young - why not 100% equities now???

[accountingsucks]

I've always seen the 60/40 or 70/30 recommended split between equities and bonds/fixed income. If your investment timeframe is 20+ years, then why can it not be 100% equities? Presumably the bond portion is for diversification, but in my mind this diversification is significantly reducing your expected returns from equities over the longhaul.

Assuming an imaginary portfolio of one equity index fund and one bond fund, if we can expect about an 8% return from the equity fund over the 20 year period, why should someone add in the bond fund that has an expected return of 5% effectively bringing down the expected return of the portfolio if it was 100% equities. At this moment I'm 100% equities and I have no plans to change this given I am 20 years from FIRE. I'm curious as to where this "wisdom" came from...

 

[newyorklady]

if you are going to be working for another 20 years, and you aren't about capital preservation i find nothing wrong with this.

 

[youbet]

At this moment I'm 100% equities and I have no plans to change this given I am 20 years from FIRE. I'm curious as to where this "wisdom" came from...

I see no problem with that. BTW, as the pages of the calendar turn, what are your plans to add fixed income investments to your stash? What might you percentage of equities be ten years from retirement for example?

 

[runchman]

Count me in the (nearly) 100% equities camp as well.

I'm 43, have a good income and am comfortable with the gyrations of the market.

I think it's a good approach if you are ok with volatility, and if you adequately diversify across asset classes.

You really have to look at how you feel about the market swings. My 750k or so portfolio dropped 23.5k the other day when the market tanked. If something like this is going to keep you up at nights, then 100% equities isn't for you.

- John

 

[Rich_by_the_Bay]

All equities sound good to me, but don't forget that a) your equities should be diversified and b) you need to keep some money liquid and nonvolatile to meet unexpected expenses over the years.

Since you'll be rebalancing annually in all likelihood, why not move, say, 1-2% of your assets annually into fixed income investments. Better yet, look at the target fund offerings which do this for you.

 

[runchman]

b) you need to keep some money liquid and nonvolatile to meet unexpected expenses over the years.

A very good point. I have a chunk in cash that I don't really consider part of my asset allocation. You don't want to be dipping into your core stash when the unexpected comes up and you need to tap some reserves.

 

[grumpy]

The question about 100% equities, even with a long investment horizon, is can you stomach the volitility without being tempted to sell when the market is down trying to prevent a bigger loss? Many investors thought they knew the answer to this question when it was only theoretical but learned differently when the markets tanked. It can be very comforting, in a long downturn, to see a portion of your portfolio (invested in fixed income vehicles) continue to grow. Some academic studies indicate that a modest allocation to fixed income can actually increase overall portfolio long term returns.

Grumpy

 

[mb]

What Grumpy said!

 

[accountingsucks]

I see no problem with that. BTW, as the pages of the calendar turn, what are your plans to add fixed income investments to your stash? What might you percentage of equities be ten years from retirement for example?

Will certainly change to less than 100% equities and at this time I do not know the answer. I have diligently been focused on paying off my mortgage which I have basically done - 30K mortgage and 35K in my mortgage reduction account...woot woot, so I feel that this fact also lets me be a bit more aggressive as I have the equity in my home behind me (recent home evaluation at 450-490K and bought for 185K in 2002).

As others have mentioned, yes I also have an emergency fund at about 8K earning 3% which of course everyone needs.

 

[runchman]

Oh no, you mentioned paying off a mortgage , let the firestorm of mortgage payoff debate begin !!!!

 

[accountingsucks]

Oh no, you mentioned paying off a mortgage , let the firestorm of mortgage payoff debate begin !!!!

Please no - seen way too many threads on that...lol. Anyways I'm in Canada so no mortgage interest deduction for us up here (unless you have a business) which makes a big difference in the decision of paying off vs retaining a mortgage.

 

[RedHawk]

I'm currently 20 and I am 100% equities in money I am saving for retirement. I can't say I'm completely 100% equities because I have a sizable position in bonds for money I need to pay for the rest of school. But I see no problem in being 100% equities if FIRE is 20 years away. With that being said, 10 years from now, I would look to invest in some fix income vehicles, but I don't see any reason to do that now.

 

[lswswein]

100% equities are ok for a highly Rational Individual. If you are the kind of person who does not look at your portfolio often and does not care if it shows long periods of losses and will continue to hold and add to it under all circumstances then you wil be ok holding 100% equities. Also people who have pensions or have their houses paid off (This is a big bond like componenet of your NW) also can hold 100% equities easily. But for someone who has no pension and also is still maybe renting or paying off a large mortgage, 100% equities is not recommened for emotinal reasons. You might not be able to hang on to the portfolio when something like the 1963-1973 stalled market with only dips comes along.

Also if future equity premiums are low bonds might outperform stocks for more periods of time. See
http://www.efficientfrontier.com/ef/402/siegel.htm

Also remember that the amt of return you are giving up when going from 100% equities to 80/20 is very small (around 0.4% per yr - quoting from memory) Bernstien in Intelligent Investor has more data on the subject

-h

 

[DangerMouse]

I think your allocation to equities always will depend on (1) your age (2) your tolerance for risk (3) your willingness to monitor your situation closel, (4) your proposed retirement date and (5) the quality of your equities.

For example there probably is no reason why a 25 yo wouldn't be in 100% equities, however I would be cringing if they were investing in penny stocks or all in one sector looking for the next big thing.

We are 44 and are 56% equities/44% cash which is probably less agressive than some. But for us, we intend to retire in 2008 so it helps us sleep at night knowing that we have sufficient cash to ride out whatever storm may happen.

 

[Running_Man]

30 years with no multi-year declines has led many people to believe in the stock religion that stocks are always the best investment. Stocks are merely one financial investment that should be considered in realtive value to other asset groups. A 100% investment come rain or shine is in reality a speculation that could end with the largest or the smallest pool of money. Odds are if you were successful early you'd stay in 100% stocks until a misfortunate run of years came along cutting your holdings by 50-70%. Then you would most likely become more conservative in your holdings.

The second problem of this is that if a sequence came along with a severe 50-70 percent drop in stocks over multi-years a recession in the economy would be most likely. Making job loss much more likely. (your state of mind may become disconcerted when you portfolio of 2 million falls to 600K and you lose your job)Bonds in that case would be a better investment as the Fed would most likely be cutting interest rates leading to gains in bond prices to offset the losses in the stock market.

Third, a bond portion holds the advantage of having funds to take advantage of severe market drops. Mere rebalancing in such cases will be it's very nature cause you to buy low and sell high, which is how bond/stock blends do better than 100% stocks in certain circumstances.

The questions to ask yourself as you save is what amount do I need to save and what do I consider a prudent return on my investment for the long term? Find investments you are comfortable with and a plan to achieve your goal. If you still want to invest 100% in stocks you will need to plan in advance for your course of action if the market has such a severe drop.

 

[wildcat]

I have seen some past data suggesting a portfolio with a small bond allocation won't lose much on return + lower SD vs a 100% equity portfolio.

Ahh someone beat me to it:

Also remember that the amt of return you are giving up when going from 100% equities to 80/20 is very small (around 0.4% per yr - quoting from memory) Bernstien in Intelligent Investor has more data on the subject

Exactly lswswein.

Risk preference, within reason, is a "to each his own" topic.

 

[danm]

<brilliant>

30 years with no multi-year declines has led many people to believe in the stock religion that stocks are always the best investment. Stocks are merely one financial investment that should be considered in realtive value to other asset groups. A 100% investment come rain or shine is in reality a speculation that could end with the largest or the smallest pool of money. Odds are if you were successful early you'd stay in 100% stocks until a misfortunate run of years came along cutting your holdings by 50-70%. Then you would most likely become more conservative in your holdings.

The second problem of this is that if a sequence came along with a severe 50-70 percent drop in stocks over multi-years a recession in the economy would be most likely. Making job loss much more likely. (your state of mind may become disconcerted when you portfolio of 2 million falls to 600K and you lose your job)Bonds in that case would be a better investment as the Fed would most likely be cutting interest rates leading to gains in bond prices to offset the losses in the stock market.

Third, a bond portion holds the advantage of having funds to take advantage of severe market drops. Mere rebalancing in such cases will be it's very nature cause you to buy low and sell high, which is how bond/stock blends do better than 100% stocks in certain circumstances.

The questions to ask yourself as you save is what amount do I need to save and what do I consider a prudent return on my investment for the long term? Find investments you are comfortable with and a plan to achieve your goal. If you still want to invest 100% in stocks you will need to plan in advance for your course of action if the market has such a severe drop.

 

[d]

another wrinkle ... if one will continue to add new money to the portfilio (at regular intervals) a higher equity % would be appropriate, than it one will make no further additions.

 

[chinaco]

DW and I turned 50 in late 2006. We have been 100% equity (diversified) up till last week (except for a short periods after sales of stock to reallocate equity into other equity investments). We moved to 70/30.

Bottom line, the 100% equity allocation have given us the growth we needed.

It has sometimes been a choppy and turbulent ride, but it did not matter because we did not need to use the money. We are planning to ER @ 55, so I diversified to prepare. If I were going to wait until 65, I would probably wait another 5 years and start gradually moving money to bonds.

It has worked for us!!!

 

[Gone4Good]

Lets talk about definitions first.

If when we say 100%, we mean our entire liquid net worth . . . then the answer is absolutely not. Why? Because @$^& happens. You lose your job, you face some uninsured disaster, whatever. In fact, young people with a very small net worth should probably have less of their liquid net worth tied up in equities then older folks. Once you establish an emergency fund that covers 6-12 months living expenses, then you can start putting money into equities. But a 28 year old making $40K with a $70K net worth should probably be looking at something like a 50/50 asset allocation of cash and equities.

 

[shanjwa5]

Go with a 30% fixed--------bonds/CD's. Check out Penfed.org for great rates on CD's every January.......6.25% fixed 3 year commitment. Then go with the remaing 70%into two funds 75% Vanguard total stock market index fund and 25% Vanguard total bond market index. Put as much money you can away this way. Guaranteed a millionaire in 20 years assuming you invest $10k per year.

 

[maddythebeagle]

What Grumpy said!

agree....also might not matter as much when you are in your 20s since dont have as much saved up...once you get a higher portfolio, might want to start thinking more about keeping what you got...

 

[CyclingInvestor]

I am 48 and recently retired. I have long been 100% (or close to it) equities,
and will continue to do so. My only non-equity money (besides half a paid-off
house) is the dividends that pile up in each account prior to being 72(t)'ed
or transferred to my checking account (usually about 2% of the total). I had no
anxiety or regrets about dropping 4% in value the last week, or substantially
greater %s in the past, and since I can live easily on half the dividend/72(t)
flow I do not expect any problems.

I agree that 100% equity allocations require more careful investing than 80/20
splits. I invest only in top quality (IMO) companies, with long histories of paying
and raising dividends, being financially responsible, not making stupid strategic
decisions, etc. Being able to live on the dividend flow makes it much easier to
ignore market downturns.

 

[48Fire]

I agree with the 100% approach when you are young. I did it, and I survived the crash of 87. At the time, part of me was happy, since I realized better to crash early than later. I had peers that were heavy into the NASDAQ funds and other aggressive funds based on short-term past performances. They were burned bad, then couldn't stomach the market volatility, got out, so got burned for the long run, too. So if you go 100%, make sure you have some diversity.

Good Luck!

 

[cute fuzzy bunny]

Most of what I've seen shows diminishing returns for >80% equities vs a huge increase in volatility. Which for certain is something you can handle when you're more than 20 years away, providing things go the same in the future as they have in the past.

Since the US economy was an emerging and stabilizing market through most of the historic data's time period, and we're more of a mature market now, I wouldnt count on the same full returns for equities that the historic data indicate.

I doubt you'd do a lot worse going with something like a target retirement 2045 fund thats about 80/20 now and slides down as you go, less volatility, most of the return, and some goodness during bond market bull runs.