Does the 100% Equity Portfolio Make Sense? Hmm, Maybe

Oops! All equities — and no, that’s not the latest Cap’n Crunch flavor.

We all know the classic 60/40 portfolio. While long a staple, some advisors argue it’s outdated, suggesting a 50/30/20 split with a slice for alternatives. But, for those who like to live on the edge, there’s a bolder option: a 100% equity portfolio.

Portfolios holding a mix of domestic and foreign stocks could be a more optimal way of diversifying than allocating to bonds, regardless of age, according to research from economists at the universities of Emory, Arizona and Missouri at Columbia. All-equities sounds risky, but the researchers argue that stock markets trend upward over time, and balanced portfolios or target-date funds, with their large bond allocations, can drag returns.

“While bonds seem to be safe, good diversifiers at short horizons, their long-term properties are really unfavorable for investors,” said Scott Cederburg, professor of finance at the University of Arizona and one of the authors of the report. “They become riskier and more correlated with stocks as the horizon grows. Combined with their low average returns, bonds are ultimately unattractive.”

Bonds, Schmonds

Analyzing stock and bond returns from 39 countries from 1890 to 2023, the researchers found that an all-equity portfolio — roughly one-third domestic stocks (likely higher for US investors) and two-thirds foreign stocks — outperformed balanced portfolios in retirement wealth, income, capital preservation and bequest at death:

• The all-equity strategy delivered 50% more retirement wealth on average.
• Under the 4% withdrawal rule — where retirees withdraw 4% of total savings in the first year — a balanced portfolio has a 17% chance of running out of wealth before death, versus 7% for the all-equity strategy.

Still, the researchers noted that holding a small share of Treasury bills early in retirement can act as a cushion as clients start withdrawals.“Even if financial planners and advisors are unwilling to recommend the optimal 100% equity portfolio, increasing their clients’ equity allocations from their current levels will likely benefit the savers over the long run and support better retirement outcomes,” Cederburg told Advisor Upside.

Risk On, Risk Off. As investors age, focus typically shifts from growth to preservation. A younger worker can ride out volatility, but a 75-year-old facing mounting medical costs may not. In Vanguard defined contribution plans, only 5% of participants are entirely in equities.
The key risk for all-equity investors remains volatility. The S&P 500 took six years to recover from the Great Recession, and some Wall Street names forecast a market correction in the next two years. Moments like that could spell disaster for investors holding only stocks. “Markets have historically rewarded long-term patient investors,” said Bryan Gum, founder of Lighthouse Planning. “At the end of the day, it comes down to the investor’s risk tolerance and the time horizon of their needs for money.”