I am one of those people who have 100% of their long-term portfolio in stocks (both in individual stocks and diversified index funds). I have an investment horizon of 50 years, so by "long-term", I mean 50 years. I have recently began to question the wisdom of a 100% stock allocation for my long-term portfolio.
Most people seem to prioritize stocks over bonds. Some even ignore bonds completely. Newer brokerage firms such as Robinhood do not even support bonds! Common reasons for preferring stocks include:
- Stocks prices can go up a lot, but the upside in bonds is severely limited (i.e. unlike stocks, bonds can't double in value within a few years)
- On a 50-100 year price chart of American stock indexes, stocks had an astronomical return compared to bonds.
Therefore, trade stocks instead of bonds, and hold stocks for the long-term.
I used to subscribe to the "common wisdom" above. However, I have recently become more skeptical:
- The S&P 500 has not beaten bond indexes over the last 20 years (2000-2020). Indeed, by looking at the price chart of the S&P 500, one observes that 2000-2020 is not the only 20 year period when stocks have underperformed bonds! Although it is possible that stocks have the magical property that makes them outperform bonds over a very long period (e.g. 100 years), there could still be decades where stocks underperform.
- The 50-100 year price chart of American stock indexes is irrelevant on its own, because it exhibits survivorship bias. With hindsight, one could say that the performance of the American economy was exceptional. Over the last 50-100 years, the stock markets of countries with revolutions, wars, famines, and long-term economic stagnation have probably had lower returns. By only looking at American markets to conclude that stocks outperform bonds over very long periods, one is probably submitting to survivorship bias and hindsight bias.
My questions are:
- Why do people recommend a portfolio allocation in bonds when the historical record says that stocks outperform bonds over the very long run? Are the reasons I listed above correct?
- Is it wise to hold 100% stocks in long-term (50 year) portfolios?
- By "stocks", I mean both individual stocks and diversified index funds (diversified across industries, geography, and economies).
- I do not care about year-to-year volatility. I only care about what the returns will be near the end of the 50 years.
