100% Stock Portfolio Or Balanced With Bonds?

Traditional wisdom tells us that investors shouldn’t invest all of their cash into stocks. It’s too risky and irresponsible for the average investor. Instead, investors should have a percentage allocation to bonds in an effort to reduce portfolio volatility. Should you invest in an all-stock portfolio?

A 100% stock portfolio will see greater returns over the long term, but a higher return comes at the cost of additional risk. This table shows the historical returns (1926-2020) of 9 different stock-to-bond portfolio ratios:

Stocks Bonds Historical Average Annual Return (1926 - 2020)
0% 100% 6.1%
20% 80% 7.2%
30% 70% 7.7%
40% 60% 8.2%
50% 50% 8.7%
60% 40% 9.1%
70% 30% 9.4%
80% 20% 9.8%
100% 0% 10.3%

Based on the information presented in the table, allocating some portion of your investment portfolio to bonds is a prudent decision. A few percentage points of a return may not be worth it to chase the historically higher average returns of an all-stock portfolio.

Benjamin Graham, in his book, “The Intelligent Investor,” says the following investors may invest in a 100% stock portfolio if you:

  • have set aside enough cash to support your family for at least one year

  • will be investing steadily for at least 20 years to come

  • survived the last bear market

  • did not sell stocks during the last bear market

  • bought more stocks during the last bear market

  • have implemented a formal plan to control your own investing behavior

This sounds a lot like the people pursuing financial independence. Emergency fund, long-term investing, buying rather than panic selling in a downturn and practicing control over your emotions.

Image of an excerpt from “The Intelligent INvestor” by benjamin graham.

Image of an excerpt from “The Intelligent INvestor” by benjamin graham.

Diversification and consistency is key

Diversification is the practice of spreading your investment capital over several different investments in different industries, sectors, geographical locations. Instead of putting all your money into one investment, you can reduce risk by spreading your money across various investment types.

Joel Greenblatt of the Wharton School of the University of Pennsylvania and adjunct professor at the Columbia University Graduate School of Business said, “Holding eight stocks eliminates 81 percent of the risk in owning just one stock, and holding 32 stocks eliminates 96 percent of the risk.”

Contrary to the belief of VTSAX die-hards, you don’t have to be invested in 3,000 stocks to be considered diversified. Low-fee index funds are GREAT investment choices for most people and will get you to your financial independence goals, but it’s important to know that it’s not the only way.

Where are your “invested assets?”

I don’t currently have any bond exposure, but that doesn’t mean that I’m 100% invested in stocks. A good portion of our household net worth is in home equity, that’s an invested asset. We contribute to the home each month, the mortgage goes down, the value appreciates over time, it creates equity.

We own a little gold and silver. Not a lot and mostly for novelty, but we have a few thousand dollars invested in physical precious metals.

I invest in individual stocks as well as index funds between my two retirement accounts and my wife’s two retirement accounts. We’re likely over-diversified, but it has worked well for us.

Have you tallied up your invested assets? Are they in retirement accounts? Taxable trading accounts? Do you have a house payment? These are important factors to know and understand about your own finances if you’re going to determine a proper allocation between stocks and bonds in your portfolio.

Dollar-cost-averaging reduces investment risk

The practice of dollar-cost-averaging is a great way to reduce the risk of an all-stock portfolio. You dollar-cost-average by consistently purchasing stocks in regular intervals over time. Sometimes you’re buying when the investment is expensive, sometimes when it’s cheaper, but over time you enjoy the upward trajector of appreciation.

Stocks are not riskiest when they’re at all-time lows, but rather when they’re at all-time highs. As long as the great business you invested in hasn’t changed, the share price going down should be nothing more than a buying opportunity for your long-term investment strategy.

What role do bonds play in a portfolio?

Bonds can be a helpful tool as long as they fit your investing strategy. Their claim to fame is their low-risk nature, but their returns will not get you to financial independence. Bonds should be used to reduce the volatility of your investment portfolio as you approach retirement age and want to ensure your investment is there when you need it to support you.

Bonds provide portfolio “Smoothing”

Portfolio smoothing the strategy of “smoothing” out the volatility of a stock portfolio without compromising on the exposure to higher risk assets. Typically, portfolio smoothing is achieved by adding a percent allocation of bonds to a stock portfolio.

In the charts below, you will see the effect of bonds on an all-stock portfolio. The returns will be lower, but the best years and worst years are also lower. This represents the smoother volatility with a mix of stocks and bonds. Rather than peaks and valleys, you’ll see rolling hills and troughs.

There are two benefits to smoothing:

  1. You’re close to retirement age

  2. You're unable to emotionally cope with the market volatility

Bonds and cash create a high opportunity cost

People in the FIRE movement and personal finance community are outspoken about not holding excess cash. Putting your money to work rather than sitting in a savings account. Once an emergency fund is funded in a high-yield savings account, it’s time to put the excess money to work.

Bonds and cash in a bank account carry a high opportunity cost. Instead of your money working for you at an average market return of 8%, it’s earning you very little towards retirement.

How much risk can you tolerate?

Risk is a matter of personal tolerance and everybody's risk tolerance is different depending on experience, time in the market, age, etc. all makeup how we react to market volatility. Understanding your own personal risk tolerance is key in deciding if an all-stock portfolio is for you.

Use The FIRE Calculator to run the numbers with an average bond yield and see where you land. The truth is, a bond makes it easy to stomach the ups and downs of the market, but if you’re young, and plan to invest for decades, bonds may not be appealing until you get closer to retirement age.

Typically, the more risk you assume, the more you should expect from your investments. Though stocks are riskier than bonds, you can expect a higher return over the long term from diversified stock investments. If you don’t see an expected return that matches the risk you’re taking, then the investment is likely ill-advised.

Beware of market risk

As you approach your target retirement age, it’s prudent for the investor to start allocating their investment portfolio to smoother, less volatile assets like bonds. This is because you plan to start withdrawing regularly from your retirement fund and your calculations for how much you can withdrawal are dependent on having a certain amount of funds available.

What happens if you’re 3-years from retirement and we enter a 30% market correction? You don’t want to wake up with one-third of your portfolio missing.

At some point in the future, you’re going to be less concerned with the growth of your portfolio, and more concerned with the income that portfolio is going to produce for you. It’s at this point that stable, dividend-producing stocks and bonds may be more attractive in your personal investment strategy.

Beware of longevity risk

We’ve all heard of market risk, but have you heard of longevity risk? Longevity risk is the risk of bonds and saving excess cash. Referring to bonds, longevity risk means they don’t offer the potential to keep up with inflation over the long term.


The allure of high stock returns has led many people to believe that a 100% stock portfolio is the best way to invest. The data tells us a different story. Even with a high bond allocation, long-term investors have seen returns in excess of 8% and 9% without having to assume as much risk as all-stock portfolios.

The truth is, bonds provide shelter against stock market volatility, but at the cost of annual returns. It’s best to understand your own personal risk tolerance and consistently stick to an investment plan that best suits your long-term goals.

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