Original article here: http://bit.ly/1Q2rFe4
Ignore standard advice - stocks are your best bet
I recently wrote an article for USA Today about asset allocation strategies and the rather antiquated notion of a 60% stocks/40% bonds portfolio. For it, I interviewed several financial experts who advocated a heavy allocation in stocks - including as much as 100% of your portfolio - even if you're in your 40s.
Unsurprisingly, I heard from many readers who considered that advice irresponsible. Their logic is simple: If you're 100% in stocks, it's nice while the market goes up, but your savings will be cut in half or worse when the market inevitably crashes.
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This seems logical on the surface, but anyone with a deeper understanding of the market should realize a 100% stock portfolio is not a strategy designed for a market with no risks - but rather a strategy designed specifically with many risks in mind.
Here's why - and how - a 100% stock portfolio can work for you:
Buy-and-hold works: Of course a 100% stock portfolio can be a killer if you buy at the top and sell at the bottom, so don't sell based on short-term trends. If you look at total returns for the S&P 500 SPX, -1.40% across the past 70 holding periods of 20 years, starting with 1926-45 and ending with 1993-2014, not a single 20-year period has posted a loss. Furthermore, a mere eight of those periods posted annual average returns of less than 2% across those years, while 18 posted annual gains of 10% or more. The worst 20-year stretch in modern market history was 1962-81, with just shy of 11% in total returns, while the best run was more than 1,200% from 1980-99. A promise of being kept whole with the possibility of upside like that makes a long-term bet in stocks a no-brainer.
Don't forget to average in: Of course, all those statistics are pretty meaningless because nobody deposits one lump sum into the market. Most of us average in, through regular contributions to a 401(k) or with our annual IRA deposit around tax time, for example. Investing like this smoothens out returns and reduces your risk long-term.
Stocks are diverse: It's also important to point out that a portfolio that is 100% in stocks can (and should be) in a wide array of investments that vary in geography, sector, market capitalization and income potential. Just as you should not time the market, you should not put all of your money in just a small handful of stocks.
Bonds are unattractive: Speaking of income potential in stocks, a "new normal" in the bond market means little relief for income investors. The yield on the 10-year Treasury TMUBMUSD10Y, -0.22% has tumbled from a peak of more than 15% in 1981 to just over 2% currently, and the chart has been in almost constant decline for 35 years. So why not consider REITs or utility stocks with double the yield of investment-grade corporates or the 10-year T-note? Consider AT&TT, -0.70% which currently has bonds maturing in 2045 yielding 4.35%, while the stock yields 5.75% in dividends, with payouts growing each year. What would you rather hold for the next 30 years?
Longevity risk: It's also important to note that while you should eventually think of dialing back your risk and protecting your nest egg, many Americans jump the gun on this and get too defensive too soon. People are living longer than ever, with the average life expectancy now up to 79 years, so that nest egg needs to last much longer than you might have thought. At the same time, you have much longer than you might have anticipated to wait out any short-term downtrend and see your portfolio bounce back. While the idea of losing a lot of your hard-earned savings when you're just 10- or 15 years from retirement can be scary, equally disturbing is the prospect of running out of money in your golden years and living another 10- or 15 years on Social Security alone.
I will readily admit that eventually there comes a time when investors need to think about capital preservation and income. But for most people that time does not come until your 40s, or in some cases, your 50s.
That's not just because of the reasons above, either. The sad reality is that Americans are so woefully unprepared for retirement that they need to be aggressive if they have any hope of retiring at all.
A 2014 Bankrate.com survey showed more than a third of American adults haven't saved a penny for retirement - and when you break that down by age, more than a quarter of those aged 50 to 64 had not even started to save yet
So before you pooh-pooh a 100% allocation in stocks as irresponsible, it's worth acknowledging the reality of long-term returns for patient investors and the rather burdensome price tag of the typical retirement.
Taken in that context, the question is not whether you should risk being 100% allocated in stocks. The question is whether you should risk not being so heavily weighted in the market.