Doug,
There is nothing inherent in equities that is inflation protected or purports to guarantee inflation beating returns. People (especially financial advisors, brokers, etc.) love to show us averages of past stock returns and past inflation adjusted stock returns. And lord almighty, how those numbers/averages are deceptive.
Why were equity returns high in the 1900's? Well, stock prices started low (and in conjunction dividend yields started out high). Also, stocks did well in times of stable and low inflation. However, in times of higher inflation, when you needed your investments to keep up (since you are spending more money from this savings as goods get more expensive), stocks did terribly (well, to be fair some stocks "less bad" than others). Stocks are not good inflation hedges.
Stocks have only "beaten" inflation b/c the past nominal returns have been so high. Well, what if the returns of stocks will be lower in the future (b/c their prices are higher now)? Stocks become much less attractive because the extra risk you take on by increasing your equity allocation does not compensate you as much as it has historically. To put it another way, the "Equity Risk Premium" will not be as high as it has been in the past. The risks/downsides of equities remain the same, but the rewards are much less.
Also, to get the future equity returns, you may have to wait 10 to 20 years before the extra risk you take pays off. Meanwhile, you're spending down your portfolio, decreasing the amount that can grow.
Did the first financial advisor even ask you how much risk you're comfortable with? As you increase your equity exposure, you increase the magnitude of the really bad outcomes. If you are trying to set up your portfolio so you won't lose big, you more or less have to give up the hopes of winning big.
If you're only comfortable with 30% stocks and 70% bonds, there is certainly nothing wrong with that. You may have to cut back on some expenses, but that is a much safer method than increasing your equity allocation in hopes of higher returns. Some will say that you'll be getting eaten alive by inflation with all those bonds. That would be true, except now we have bonds that are inflation protected (TIPS). Of course, the CPI may not reflect the rise or fall in the prices of goods you personally consume.
I created a little spreadsheet for my own amusement to see how unattractive stocks would get as their returns got closer to bonds. If you want to play around with it (it's pretty low tech), here it is:
http://www.geocities.com/ats5g31/stocks_vs_bonds.xls
You can vary the stock and bond return %'s to see how that affects the incremental return for adding more stocks. Also shown are the returns for various asset mixes from three bear markets. Some better examples are in William Bernstein's "The Four Pillars of Investing", on pp. 114-116. Particularly table 4-1, figure 4-6 and 4-7. I highly recommend reading it.
- Alec