Thu 1 Feb 2007
I know I have had a few people comment on some of my posts that I’m too heavily weighted towards stocks (100%) and it’s sort of common knowledge that when laying out your asset allocation in your portfolio that it is a mixture of stocks and bonds. Even most lifestyle funds for the most risky aggressive young punk classification have some money in bonds. For some reason I can’t get it through my thick skull why someone would put any money in a historically lower performing investment tool for money that won’t be touched for 30 or more years.
If stocks are the best performing investment long-term hands down and you can wait out the ups and downs in the market, then why wouldn’t you be entirely invested in stocks to get the most bang for your buck long term. Certainly once you get closer to retirement age you should start moving a portion of your investments to more stable fixed income stocks/bonds, but when you got as much time as I do I just don’t understand why you would put any money in bonds/treasuries/etc.
So here is where someone comes along and educates me. I know stocks are riskier and you have to take into account the risk adjusted rate of return, but if bonds risk adjusted return were higher than stocks (which I’m pretty certain they aren’t) then you should be 100% bonds long-term. I know diversification is good and bonds will help hold up your portfolio in the short-term if the stock market tanks, but it’s the short term….WHO CARES ABOUT THE SHORT TERM. If long-term those stocks are going to bounce back and handidly trounce bonds, then I can handle the fact that for some 5 year span in there I am going to lose my ass (hypothetical paper I spend too much time worrying about my portfolio’s performance in the short term loss).
Now just as a caveat I’m somewhat sure my 100% stock theory here is wrong in some respects I just don’t know why, so I’m asking for someone to school me, because I’m certain that I’ve run across articles that talk about efficient allocation and some mixture is better than 100% stocks, I just am too dense to know why. I figured I can’t be the only one so hopefully once someone smarter than myself shows up with the answer this will be a valuable article for some of readers.