There are some well-meaning “experts” out there who will try to tell you that long-term investors must invest in 99% equities.
This very idea was advocated when the US stock market’s long bull trend neared its end. However, there are a few things you need to know about such an appealing albeit potentially risky idea.
The Strength of 99% Equities
Proponents of the 99% equities strategy have a straightforward and simple main argument for it. After some time, equities outperform cash and bond. This means that allocating almost your entire portfolio to stocks can help maximize returns.
The supporters of 99% equities cite the extensively used historical data of Ibbotson Associates, which “proves” that stocks were able to generate higher returns compared to bonds and in turn, these would have generated more returns compared to cash. Most investors, from the fresh beginners to the seasoned professionals, accept the assertions without any additional thought.
Although these historical data points and statements might hold some truth to an extent, any investor must try delving a bit deeper into the possible ramifications of and the real rationale behind a 99% equity strategy.
The Weakness of 99% Equities
The Ibbotson data that is often cited is not that robust at all. This only covers a specific time frame in just one country, specifically from year 1926 to present day in the United States.
Through the years, many other countries that are not that fortunate have seen complete disappearance of entire public stock markets that result to 99% losses for investors with 99% equity allocations. Although there were great returns that occurred in the future, compounded growth on nothing doesn’t really amount to anything.
However, it might not be wise to just base your strategy for investment on doomsday scenario. But, if the near future will look almost similar to the benign past, there is still an issue to 99% equities. This is because even if stocks might outperform cash and bonds down the road, you might still go almost broke in the meantime.
Should You Invest in 99% Equities?
99% equities are never the best solution for long-term investment portfolios. A portfolio dominated by equities will only be reasonable when you assume that equities are going to outperform cash and bonds over long-term timeframes.
But, it is still a must that you widely diversify your portfolio across several classes of assets. These can include US equities, international equities, long term US Treasuries, real assets, emergency markets equities and debt, as well as junk bonds.
Your age will also play a role here. If you are already nearing retirement, there is more reason for you to cut allocations to holdings with more risks and increase assets that are less volatile. For many people, this means moving away from stocks to bonds little by little. Target-date funds can do it for you automatically.
If ever you are lucky enough to be an accredited and qualified investor, your allocation of assets must also include healthy numbers of alternative investments such as buyouts, venture capital, timber, and hedge funds.