By Scott Ronalds
Stocks are the engine that drive returns in a portfolio. Over long periods of time, they produce the greatest capital growth and allow for the greatest compounding of wealth.
Bonds also serve a purpose in most portfolios: they tend to go up when stocks go down (although not always) and therefore act as a valuable ballast. They also pay out a steady stream of income for those who need it. But bonds provide lower long-term returns than stocks. Bond junkies will point out that there are many periods over which they have beaten stocks, but over 30, 40 or 50 years, the odds of bonds winning are little to none – especially at today’s starting point, with interest rates hovering around all-time lows.
If you’re an investor with a 30+ year time horizon, stocks are your best friend and should comprise the bulk, if not all, of your portfolio. I’m talking to you, Millennials and Gen X. But investors who intend to gift a good portion of their portfolio to younger beneficiaries should also take note.
There are a few important caveats, however. (1) You need to be well diversified – i.e. own stocks across a broad range of industries, sizes and geographic regions. (2) You need to stick to your plan and have an iron stomach for volatility – how did you handle 2008/09? (3) And you need to truly have a long-term time horizon (if you have any short or medium-term needs or anticipated expenditures, cash should be set aside for them). These requirements can’t be emphasized enough. Succumbing to volatility or throwing in the towel prematurely can set you back substantially.
Studies suggest that investors with a long runway are under-invested in stocks. A UBS report last year concluded: “Millennials (people ages 21-36) are the most fiscally conservative generation since the Great Depression … their average asset allocation is extremely conservative, with the average portfolio dedicating 52% to cash, compared to 23% cash for other investors.” Many people don’t have the stomach for stocks, with recent memories of the global financial crisis of 2008/09 still looming large. Fair enough. The inclusion of bonds in a portfolio is recommended for most investors because of their diversification and volatility dampening qualities. But if you meet the above requirements and have the resolve for an all-stock portfolio, don’t let bonds stand in your way.
[Post script: What does my portfolio look like, you might ask? I’m over 90% stocks, mostly through the Steadyhand Equity Fund, Global Equity Fund and Small-Cap Equity Fund. I’m shy of 100% as I also own some of our Income Fund, but only because the manager is just so darn good.]