Many financial planners parrot the same old platitude when asked how much of your long-term investment capital should be in stocks.
They typically say, “100% minus your age."
Following that advice would dictate that a 20-year-old would keep only 80% of their IRA or 401k in equities with 20% in cash or bonds. A 40-year-old woman would have a 60% stock and 40% bond mix; a 60-ish person would hold around 40% equities and 60% in fixed income.
That template is easy to understand but very detrimental to your chances for a comfortable retirement.
What makes the plan into bad advice? The entire history of investing in America says following it will cost you big time when you’re ready to start drawing on your nest egg.
The classic mix presumes that volatility could cripple you if you were forced to take out money at the wrong time. It ignores the flip side of that equation. What will bring your account to the maximum level possible before you start withdrawing?
True financial security comes from building up enough money by retirement age, that estate planning, not asset allocation, is your biggest concern.
David Katz, president and chief Investment officer of Matrix Asset Management, published an excellent chart this week addressing the topic of asset allocation.
The specific numbers are not the crux of the issue but the relative results are of utmost importance. In his example someone with 30-years to retirement would accumulate $2,567,410 in an all-stock portfolio versus just $679,567 investing100% in fixed income. Wouldn't having an extra $1.89 million dollars in your IRA take your focus off short-term fluctuations?
The results were universal across all long-term periods. The higher the percentages of equities held, the larger your final account value.
The Wall Street Journal did a similar exercise, with parallel results, in June of 2013.The more stocks you owned the more money you had for retirement. Over a 35-year term they figured owning stocks would have been worth a cool $3.02 million more versus the "safe" 100% bond portfolio.
No matter what your age, the time horizon on your money is the same. You need to do something with all your money for the rest of your life. SocialSecurity.gov says that once you make it to age 60, it is likely that you will live another 23 to 26 years.
That pretty well snuffs out the concept that you won’t have time to recover if the market takes a tumble. Five years after the 57% plunge from 2007's peak to the March 2009 nadir we are already well above the old highs and more than triple the low point on a total return basis.
The same CFPs that tell you not to maximize potential upside are the ones advising clients to plan on taking out no more than 4% of their total value each year. Even if you were all-in with stocks, a small withdrawal taken near the bottom in 2009, left the other 96% of your money free to recover, rather than earning almost nothing while sitting in cash.
Today’s artificially low interest rates, due to the Fed’s zero interest rate policy (ZIRP), make buying bonds today an even worse proposition than normal. The figures shown below are not yet updated for a great 2013, for stocks, and one of history’s worst years for bonds.
Put history on your side instead of fighting it. Grow your account large enough and you’ll never need to worry about volatility again.
Disclosure: Heavy in stocks, I own no bonds.