What are the pros and cons of having your entire investment portfolio invested in stocks versus a multi-asset class portfolio?
In this episode you’ll learn:
- What are some investment options if you want to be 100% invested in stocks.
- What attributes do you need as an investor to have an all stock portfolio.
- Why it is difficult for active managers to outperform.
- Why an all Japanese stock portfolio has severely underperformed for 25 years and how it is possible that a U.S. stock portfolio could suffer the same fate.
- What are the pros and cons of a multi-asset class portfolio.
- Overview of The Simple Path to Wealth by J.L. Collins
- Overview of Investing at Level 3 by James B. Cloonan
David Stein examines whether or not being 100% invested in stocks is a legitimate strategy for a successful portfolio by considering the research explored through J.L. Collins’s book The Simple Path to Wealth and James B. Cloonan’s book Investing At Level Three. While investing in only stocks has proven to be a successful approach, are the risks associated with the strategy worth it? Or is keeping a diverse portfolio the better option for increasing wealth?
Is investing 100% in stocks a viable option?
Investing doesn’t have to be complicated. It can truly be as simple as investing your entire portfolio in one asset class—such as stocks. For example, investing in something like the Vanguard Total Stock Market Index Fund allows you to cover almost every publicly traded company in the U.S. But is putting all of your eggs in one basket the wisest choice?
Both Collins and Cloonan believe that investing 100% in stocks is the best way to approach investing. Collins explains in his book that while he was an investment analyst, he discovered that not even the professional analysts who spent years researching and trying to outsmart the system could do it. Even though they were the best in the world, they had a difficult time to outperform the market. Because of this, money managers have an incredibly hard time finding an edge and deciphering which companies are mispriced and will end up surprising to the upside, leading to outperformance. So why not invest everything in stocks so that you can cover all the bases instead of trying to figure out which one or two stocks to invest in?
Volatility may look dangerous, but it’s not the same as risk
Investing 100% in stocks can be risky. Not only is it volatile, but it can also turn into true risk if the investor is not willing to keep their money in the game when things get rough. Cloonan suggests in his book a way to mitigate the risk is to invest in small company stocks, microcap, and small-cap value stocks—that way you aren’t entirely invested in large-company stocks that dominate the market. David explains that while those types of small-cap stocks have proven to be quite volatile, the long-term performances have been promising. Volatility is normal and to be expected. The goal is to not risk or sustain a total loss. Volatility doesn’t equate to a total loss. It may mean that you see negative returns for a short period of time, but it shouldn’t mean that you are without the assets that you need. Both Cloonan and Collins agree that if you invest 100% in stocks, you will lose a large amount of money at some point in your investment career. But the return will ultimately always be much higher. The question is—do you, as the investor, have the endurance to outlast the low points so that you can collect the greater profit in the end?
Understanding what influences the stock market
David unpacks the example of the Japanese stock market in the 90s. Making up 40% of the global stock market, Japan was soaring in wealth and opportunity. But it ultimately didn’t perform well enough to generate a profit greater than 1% annualized in the current market. It has never regained its previous, initial strength. Because of such examples, David says that he is wary of putting his entire portfolio in the hands of one country’s financial system and into only one asset category, such as stocks.
Both Cloonan and Collins agree that there are many factors that influence the behavior of the stock market and that those must be taken into consideration. The stories that investors tell themselves about the fundamentals of the market actually influence the market itself. The stories in people’s heads can change quickly, affecting how people invest—and thereby influencing the market’s patterns. Volatility increases, creating a rollercoaster ride for the investor who is 100% invested in stocks.
Do you have the endurance to invest 100% in stocks?
Cloonan and Collins believe, despite the volatility, that if the investor is willing to watch their wealth be chopped in half and grow back again over and over, the end result will be worth the turbulence. The key is to not panic while the rest of the investors do. The stock market does traditionally outperform all other asset classes. Market crashes always recover. But do you, as the investor, have the patience to see your investment crash and build back up again—even if it takes 25 years?
David shares that, in his opinion, the best strategy is to diversify your portfolio. No, the ultimate ROI may not be as lucrative as sticking with the stock market over a period of several decades. But the return is often more steady and more trustworthy. There are many asset classes available. Land, private investments, venture capital, bonds, and stocks are all options. While learning what to invest in and when does take time and energy, it is less volatile and keeps the risk of not having the assets you need at bay. Is investing 100% of your portfolio in stocks a viable option? Yes, it is. But it requires a level of endurance that many investors do not have.
- [0:19] Can investing really be as simple as investing 100% of your portfolio in stocks?
- [4:16] Can diligent analysis actually outperform the index?
- [8:50] Understanding the difference between risk and volatility.
- [14:24] Knowing the risks associated with investing 100% in stocks.
- [19:17] The influence of the crowd and the misjudgments of investors on the market.
- [23:25] The benefits of diversifying your portfolio.
- [26:43] Investing 100% in stocks is viable, but it will come with ups and downs.
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