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Should Young People Invest 100% in Equities?

Another great question David Chilton, The Wealthy Barber, asked me on his podcast is should young people invest 100% in equities?  Opinions on this point change with the times.  In the late 1970s, popular opinion was that it was crazy to put any money at all in the stock market.  By the late 1990s dot-com bubble, people believed that stocks were the path to great wealth.

Stock markets have been performing very well for a long time, so it’s not surprising that popular opinion favours stock investing today.  Ironically, investing 100% in stocks is best when popular opinion is against stocks.  At today’s elevated stock prices, the case for 100% stock ownership is weaker than it has been in most of the past.

But this doesn’t mean that investing in stocks today is a bad idea.  It just means that expected future returns are lower than usual, and the odds of a stock crash are higher than usual.  But if you can hold for the long term, you can ride out the short term pain to get long-term gain.

Holding for the long term is easier said than done.  David brought up one big reason that holding for the long term can be difficult: debt.  If you have a margin loan, a big mortgage, or any other large debt, it gets much harder to hold through a market crash.  The fact that you’re calm while stocks are down may not even matter if you’re forced to sell stocks to raise money to cover debt.

Another reason it can be hard to stay invested through a market crash is your emotional reaction.  I’ve lived through a couple of big crashes, and I didn’t sell.  But I didn’t really know how I’d react until I lived through the markets crashing.  It’s hard to tell if someone has the temperament to hold on through turmoil.

Some people dream of selling stocks before the markets crash and then buying back in at lower prices.  This is rarely how it works.  People tend to sell after stocks have already dropped, and then they stay out of the stock market for a very long time, because they’re waiting for a feeling of safety that never comes.  This is why we so often hear the advice to hold on.

In the end, the best portfolio is the one you can stick with.  If you have a 100% equity portfolio and you would sell in a panic after a crash, then you’re better off holding some bonds with your equities.  The exact mix depends on what you can stick with.  Until you’ve faced crashing markets, it’s hard to know how much volatility you can stomach.

I was 100% invested in stocks during my working years.  I’ve advised my sons to invest 100% in stocks.  So, I’m a believer in 100% stock ownership.  You just have to make sure you can stick with it.

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