There are investors who sometimes think that dedicating their entire portfolio to stocks is a good idea. And even though this strategy somehow sounds appealing to the some investors, there are still many downside to it.
The Basis of the Proponents
To posit the idea of investing the whole portfolio in stocks, proponents say that in the longer run, equities outperform bonds and cash. This means that allocating your entire portfolio to stocks will just maximize your returns. This is a pretty direct and straightforward argument.
To support their views and arguments, proponent of the 100 percent equities strategy indicate the widely-used Ibbotson Associates historical data. They say that the data “proves” that stocks have generated greater returns than bonds, which have generated higher returns when compared to cash.
Even though most investors view this notion to be faulty or unrealistic at best, many experienced professional as well as market true beginners still accept these ideas without giving it much thought.
Even if such statements and data can be true to a certain extent, investors should still dig a lot deeper into the rationale and logic behind such assertion. They should also think about the potential repercussions of going all-in with stocks.
The (Huge) Downside: the Counter-argument
The counter-argument from those who oppose the 100 percent equities strategy say that the Ibbotson data is not very solid.
For one, it convers just one particular time period and just a single country, which is the United States. Going back throughout history, some other less rich countries have seen their stock markets disappear altogether. That then generated 100 percent loss for investors who have had their whole portfolio dedicated to stocks and equities.
And even if the future eventually gave back great returns, compounded growth on zero percent doesn’t sound too appealing.
However, it’s not always smart to think about the stock market in these unfortunate terms. Still, the 100 percent equity strategy still sounds unintelligent and problematic. This is because even if stocks may outperform bonds and cash in the long run, you could still fall down and hit rock bottom in the near term.
Market crashes are also very much a danger for those who choose to go all-in. If the stock market lost around 40 percent of its value, it would be difficult to withdraw even 5 percent per year from your savings just to take care of relatively common expenses.
Proponents of the 100 percent equities strategy argue that investors should just merely stay the course and wait until the market crash ends. Theoretically, they will eventually recover and gain more if they’re patient enough.
However, this is still a flawed argument because it assumes that invest can stay the course and not ditch their strategy. This is quite contrary to real life situations.
What really happens in the real world is that investors cannot easily ignore the prevailing wisdom, much more take absolutely no actions during depressing market conditions.