stocks
I fully understand the desire to use a 100% stock portfolio. Once somebody looks at past behavior of the stock market and understands the general rule between risk and return, it seems obvious to question why they might want to put 10%, 25%, 40%, or more of their portfolio into those pesky low-returning bonds.
A 100% stock proponent might then argue, “But that means that anyone who has started investing in the last decade can’t have a 100% stock portfolio when their risk tolerance should be highest at the beginning of their career.”
In truth, it doesn’t matter what the source of that debt is. If you have student loans and a mortgage and a relatively small portfolio, in reality, you may already have a portfolio that is already > 100% stocks.
The same reason you feel uncomfortable with a 100% small-value portfolio should make you uncomfortable with a 100% stock portfolio. It’s a very big bet on the future resembling the past.
The goal of investing isn’t to win, it’s to not lose. Consider both the likelihood that your assumptions are wrong AND the consequences when designing your portfolio.
Far better to underestimate your risk tolerance than overestimate it. It’s kind of like The Price is Right, where you try to get as close as you can to your risk tolerance without going over.
#5 Experienced Investors Say Don’t Use a 100% Stock Portfolio
These older folks say “Pay off your mortgage” even though the numbers suggest you could come out ahead by not doing so. They say, “Own both stocks and bonds” even though they would have come out ahead with a 100% stock portfolio over their lifetime. Ignore the wisdom of your elders at your own peril.
#6 Don’t Take Investment Risks You Don’t Have To
Some people may need a 100% stock portfolio to meet their goals. Some people may also need to highly leverage their lives by borrowing against the house in order to invest more. Others may need a highly leveraged real estate portfolio to get what they want. But the chances of you needing to do that to reach your goal are probably pretty low.
# 7 We Overestimate How Much the Future Will Resemble the Past
A common behavioral error is to expect that the future will resemble the past, particularly the recent past. We project what we have seen will continue indefinitely. A careful study of the past will reveal that time and time again investors are surprised when that isn’t the case.