The smart investor: a 100% stock portfolio, a good idea?

In this column published every two weeks, we give you concrete ideas for investing your money.

This is one of the basic rules of investing: you should have a mix of stocks and bonds in your portfolio. But this dogma is increasingly being called into question, especially among young people. Right or wrong?

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Two studies published last year by three American finance professors, including Scott Cederburg of the University of Arizona, caused a stir and provided grist for the mill of those who advocate a 100% equity portfolio.

The database used to carry out the studies is impressive: it includes the returns achieved by the stock and bond markets of 38 developed countries from 1890 to 2019!

The conclusion of the studies is striking: investors would be wise to abandon bonds altogether and focus solely on stocks.

The risk of bonds

Here is the risk of losing money over 30 years with the following portfolios (taking into account inflation):

• Shares of companies from the saver’s country: 13%
• Government bonds: 27%
• Foreign stocks: 4%

We therefore see that the risk of becoming poorer by investing in equity funds is not negligible, but that it is even higher with bonds!

According to the researchers, the portfolio that generated the best long-term returns was the one composed of 50% domestic stocks and 50% foreign stocks – including for retirees who live off their investments.

As the S&P 500 reaches new highs, many investors see no point in buying bonds, especially since they have still not recovered from their sharp fall in 2022.

“For me, having bonds for 30 years in case there is turbulence doesn’t make sense if you calculate all the returns you leave on the table over the years just to limit your losses” , says PierOlivier Drouin, a young investor from Lévis.

But among the clients of James Parkyn, portfolio manager at PWL Capital in Montreal, they are still in the minority to opt for a 100% equity portfolio.

Flexibility

“I find that it is always prudent to have money that is invested securely, that will keep its value and that will be available quickly if needed,” he says.

Mr. Parkyn recognizes, however, that the trend is towards increasing the weight of stocks in portfolios. “I would say that the traditional 60/40 [60% actions, 40% obligations] has now become 70/30,” he notes.

Remember that it is easier than ever to build a diversified portfolio – with or without bonds – with asset allocation ETFs (see table).

“There are so many good, simple and inexpensive tools, which we didn’t have not so long ago, which allow us to create super robust portfolios” underlines the specialist, while emphasizing the useful role, even essential, that a professional advisor can play, among other things on a behavioral level.

He shares this revealing anecdote. When the stock markets fell at the start of the COVID-19 pandemic in March 2020, two investors he knows panicked and sold a large part of their portfolio, thus missing the rapid rise in the markets. One was the head of finance of a multinational and the other, a former employee of the Caisse de dépôt.

Even experts can make bad decisions under stress!

If you are thinking about opting for a 100% stock portfolio, ask yourself this question and answer it honestly: will you be able to hold on if the stock markets plunge by more than 30%, like in 2008?

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