by Scott Ronalds
"What’s the most aggressive portfolio I could build with you guys?"
I got this question from an investor the other day. Before answering, I had to qualify that he had a high tolerance for risk and a long investing horizon. I pointed him to our Volatility Meter to illustrate just how significant the ups and downs can be for an all-stock portfolio.
The investor assured me that he had a multi-decade time horizon in mind and isn’t deterred by volatility. Actually, he said he loves bear markets because he can buy stocks on sale. I probed him on what he did in 2008/09 when markets were tanking, and he proudly told me he was buying, not selling.
It was clear that I was dealing with an aggressive investor. He also checked the other boxes as being someone for whom an all-stock portfolio made sense. He had little debt, no dependents, and no near or medium-term income needs.
I walked him through our model portfolios (which are hypothetical portfolios that represent a suggested mix of funds designed to meet the objectives of various types of investors) and keyed in on our Aggressive Growth portfolio. It’s made up of our Equity Fund (40%), Global Equity Fund (40%) and Small-Cap Equity Fund (20%). The portfolio is 100% stocks, and is well diversified from a geographic, industry and market capitalization perspective. Still, it’s only suitable for high-risk investors.
As our conversation progressed, the investor asked whether it would make sense to just hold the Small-Cap Fund, knowing it’s our most aggressive stand-alone fund (since small-cap stocks have historically produced the highest returns, albeit with higher volatility), and has been our top performer since inception (11+ years).
I let him know this approach isn’t something we would recommend, as he would be giving up valuable diversification (geographic, industry and market-cap) unless he holds other stocks or funds elsewhere. Plus, it could prove hard to stick to such a strategy when the fund underperforms.
If he’s truly a Rip Van Winkle investor (he falls asleep for 30 years and doesn’t touch his portfolio), holding the Small-Cap Fund on its own could very well provide the highest long-term return. Nevertheless, I encouraged him to hold our Global Fund and Equity Fund as well, even if he has a bias towards small-cap stocks. The future is unpredictable, after all.
We're not a bank.
Which means we don't have to communicate like one (phew!). Sign up for our blog to get the straight goods on investing.