Bonds: Is 100% Stocks Too Much?

How often do you worry about having too much stock exposue? Stocks have served us well over the last decade, especially as compared to bonds and inflation. But is it just too risky to be ~100% stocks? Here are a few thoughts and one answer to the question: How much stock should you own?

You can see in the chart above that stocks (i.e. the Vanguard Total Market Index) have clearly dominated in performance over the last decade, as compared to bonds (BND) which haven’t even been able to keep up with inflation. Yuck!

But the last decade has been abnormal considering pandemic stimulus spiked inflation to extraordinary levels and the end of ZIRP (the Fed’s zero interest rate policy) brought a rapid increase to interest rates (when rates rise, bond prices fall).

Certainly there have been short-term periods over the last decade when bonds performed dramatically better than stocks, as you can see in the chart above (keep this in mind if you have near-term spending/liquidity needs).

Is The “Balanced Portfolio” Dead?

Increasingly, investors believe the traditional “Balanced Portfolio” (60% Stocks / 40% Bonds) is dead. Even the Vanguard 2045 “Target Date Retirement Fund” (VTIVX) has only a 15% allocation to bonds these days (+84% stocks and 1% cash).

Yet sitting in 100% stocks still feels risky, considering throughout history we’ve had a “Tech Bubble” burst (2000—), a “Great Depression” (1929—) and a Great Financial Crisis (2008—).

On the other hand, and to be fair, even if 100% of your “long-term” investments are in stocks, you likely still have a significant investment in your job (it may or may not produce more annual gains than your stocks), your home (real estate can be an attractive “leveraged asset” considering you typically only put 20% down, but get the price appreciation benefits based on the full value of your home) and/or your family, pension, social security, etc.

Side Note: Own Individual Bonds, Not Bond Funds

Also important to note, there are BIG advantages to owning individual bonds instead of bond funds (like BND and the bond funds in Vanguard’s Target Date Funds) because you have more control over gains/losses and taxes! For example, bond funds can be forced to buy and sell the individual bonds in their funds simply to meet liquidity needs (purchases and redemptions by investors) and this can result in inefficient tax recognition (that is passed on to you). It’s much more tax efficient if you purchase your own individual bonds.

Is Crypto the Answer?

Even I see some of the benefits of cryptocurrency (e.g. Bitcoin) as an “investment” because it isn’t subject to the same monetary policy manipulation and inflation/deflation risks as fiat currency. Yet I have a hard time taking it as a serious alternative because, unlike traditonal investments (stocks, bonds, real estate), crypto produces no earnings, pays no dividends/interest and has zero physical value.

Bonds: If you have more money than you need?

Some investors (and large organizations like pension funds) have more than enough money to meet their needs, and therefore choose to “annuitize” their portfolios with 100% guaranteed bonds. For example, if you’re 35 years old, have $40,000,000 in cash (from the startup company you just exited) why wouldn’t you just lock in a 3.5% interest rate (on top investmet grade bonds) for the next 50 years ($1.4 million in annual interest payments for the rest of your life doesn’t sound all that bad). Even if you’re “annuitizing” just part of your total nest egg, it can make sense to own some bonds.

The Bottom Line:

A 100% stock portfolio absolutely can be an acceptable investment strategy, as long as you are prudently diversified and truly have a long-term investment horizon. Obviously, if you have near-term cash/liquidity needs, stocks can be WAY too risky (volatile) in the short-term. But as a long-term investor, owning profitable, growing businesses (and even sometimes businesses trending towards future profitability based on secular megatrends) can be an excellent strategy if it is consistent with your personal situation and goals.