Remember those people who argued that smart investors should always be 100% in the stock market? A Wall Street Journal columnist was among them. Stocks do better than other investments over the years, the argument goes, so – if you have a long time horizon – forget about everything except stocks. If that columnist ever needed money, he wrote, he would just sell a few stocks, or borrow against them.
It’s an intriguing point of view.
In fact, several years ago when I sold my house and wrote that I had put my huge, easily-gotten gains into a ladder of CDs, a reader told me that I was obviously a beginner. I should have plopped all my profit into the stock market, he insisted. (I dollar-cost-averaged in.)
Among those who objected to the 100% solution was, as I recall, Marty Whitman, who pointed out that just about everyone, at some time or another during their lives, has a big need for ready cash. You could, of course, sell good stocks when they’re cheap—but who wants to?
By the same simplistic reasoning, you might keep your entire portfolio in small-company stocks, simply because they do best over the years. (Okay, erratically and unpredictably.) Years ago I told a co-worker that small-company stocks did best, so she put her entire 401(k) into small-compoany stocks. By the time I persuaded her to recognize how risky this strategy was, she had made a small fortune.
Right now, I’m wondering how those everything-in-stocks people are feeling, what with the market down so steeply. My own portfolio has, thankfully, been insulated a bit by cash and fixed-income investments, along with energy stocks. (My own time horizon, by the way, is relatively short.)
Even so, I am not totally immune from pain. I find it hard to believe that even my estimable Dodge & Cox funds have suffered so much!
Still, having all your money in stocks – if you can imperturbably and economically wait out a prolonged bear market – may actually be appropriate for some people.
A physician friend of mine has his entire portfolio in stocks, and he’s worth at least a few million. “I can live on the dividends,” explains the good doctor, who is approaching 90. “And I’m really investing for my small grandchildren—who would want me to be entirely in the stock market.”
The little kids are probably blissfully unaware of how much potential inheritance they have lost recently—no doubt, only temporarily.
But exceptions aside, I believe the shrewd estate lawyer who once told me that most people aren’t brave enough to have more than 80% of their portfolios in stocks.
No doubt “loss aversion” is part of the explanation—the pain we suffer from losses is roughly twice as intense as the pleasure we get from winners. And if I’m suffering this much from a 10% loss, I’m truly grateful it’s not 20%.
It’s an intriguing point of view.
In fact, several years ago when I sold my house and wrote that I had put my huge, easily-gotten gains into a ladder of CDs, a reader told me that I was obviously a beginner. I should have plopped all my profit into the stock market, he insisted. (I dollar-cost-averaged in.)
Among those who objected to the 100% solution was, as I recall, Marty Whitman, who pointed out that just about everyone, at some time or another during their lives, has a big need for ready cash. You could, of course, sell good stocks when they’re cheap—but who wants to?
By the same simplistic reasoning, you might keep your entire portfolio in small-company stocks, simply because they do best over the years. (Okay, erratically and unpredictably.) Years ago I told a co-worker that small-company stocks did best, so she put her entire 401(k) into small-compoany stocks. By the time I persuaded her to recognize how risky this strategy was, she had made a small fortune.
Right now, I’m wondering how those everything-in-stocks people are feeling, what with the market down so steeply. My own portfolio has, thankfully, been insulated a bit by cash and fixed-income investments, along with energy stocks. (My own time horizon, by the way, is relatively short.)
Even so, I am not totally immune from pain. I find it hard to believe that even my estimable Dodge & Cox funds have suffered so much!
Still, having all your money in stocks – if you can imperturbably and economically wait out a prolonged bear market – may actually be appropriate for some people.
A physician friend of mine has his entire portfolio in stocks, and he’s worth at least a few million. “I can live on the dividends,” explains the good doctor, who is approaching 90. “And I’m really investing for my small grandchildren—who would want me to be entirely in the stock market.”
The little kids are probably blissfully unaware of how much potential inheritance they have lost recently—no doubt, only temporarily.
But exceptions aside, I believe the shrewd estate lawyer who once told me that most people aren’t brave enough to have more than 80% of their portfolios in stocks.
No doubt “loss aversion” is part of the explanation—the pain we suffer from losses is roughly twice as intense as the pleasure we get from winners. And if I’m suffering this much from a 10% loss, I’m truly grateful it’s not 20%.
