What stops you from owning a 100% stock portfolio all your life? EMOTION and BEHAVIOR. Yes, I understand that as you get closer to “retirement” that you could have volatility and your portfolio can go down, temporarily. Drawdowns do matter. Taking money out of your portfolio while its down could impact the longevity of your money. Blah, Blah Blah.
To be clear, I am not suggesting that 100% of your life savings gets invested into stocks tomorrow. There are more planning decisions involved regarding your short-term and mid-term objectives in life. However, once it is determined and certain monies are identified as “long-term”, stocks are life.
If you looked at the diagram below and were given three investment options which would you choose?
I choose the $100,000 turning into $811,451 ALL DAY long. The 1-year period demonstrates that historically, stocks can go down by 39%, or your $100,000 can temporarily be $61,000. According to studies by DALBAR, the average investor normally panic sells because they are sick to their stomach. Their brain is telling them to sell and the media is swaying their opinion even more. A Behavior Financial Advisor can keep you in the game. If you held for 5 years, the worst period was -3%. Since 1950, US Stocks have NEVER been negative in fact averaged 6% on the low end.
I do realize that 20 years is eternity. There is a built-in principle here that you are an optimist. That you believe America will continue to innovate and embrace technology to create economies.
How about this chart?
We are told that we should diversify, but for some people, maybe we are overdiversifying. Maybe your stock portion of your wealth accumulation plan should be 100% small cap stocks? The evidence is compelling. This strategy will indeed require you to watch your friends make money around you in certain period of underperformance. But what great things in life don’t require patience, discipline and sacrifice?
This year is a perfect example – here are the calendar year returns of the same strategies as the chart above.
- Long-Term Govt Bonds = 20.84%
- US Large Cap Index = 14.20%
- US Small Cap Index = 9.67%
- Treasury Bills = 1.67%
Gut check – Would you be switching strategies or hanging on?
At the end of the day, diversification does matter in short periods of time. For the long-term investor with 20+ years, who can embrace risk, however, maybe this is all you need to know.
Don’t hesitate to reach out with questions about how your portfolio aligns with your long-term life goals.
*Athanassios Panagiotakopoulos is an Investment Advisor Representative with Dynamic Wealth Advisors dba Life Managed. All investment advisory services are offered through Dynamic Wealth Advisors.