100 Percent Invested in Stocks

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Do you think you have the risk tolerance to invest 100% of your portfolio in equities?  I had an asset allocation of 100% invested in equities for over 10 years.  At this stage in my life, However, I no longer have the need or desire to have that asset allocation.  That was how my portfolio was invested when I reached my first milestone of Saving $100,000 by age 30.

This is the first of a 4-post series about my asset allocation.  This series on asset allocation is about my asset allocation at different points in my investing career.  The series is based on where I started, what happened, where I am at now, and were I will be heading based on age and risk tolerance.

My investing career began in 1997.  This was a time Alan Greenspan referred to as a period of irrational exuberance.  The stock market was soaring.  The S&P 500 had an average return of over 15% per year from 1989 to 1999.  If a person invested $100 in the Vanguard 500 Index Fund (VFINX) in 1989, it would have grown to $692 by 1999.

In 1997, I purchased my first mutual fund.  My first fund was the Vanguard 500 index fund (VFINX).  This was the only investment that I owned from 1997 until 2000.  I would purchase at least $500 worth of this funds shares per month.  Over that 3-year period, the Vanguard 500 averaged a return of nearly 20% per year.

In 2000, as the result of my savings and market returns, my portfolio was large enough to add more funds.  To improve my diversification, I wanted to add small caps and international stocks to my asset allocation.  I added the Vanguard Extended Market Index Fund (VEXMX).  By adding the Vanguard Extended Market Index fund to my portfolio, I could replicate the total stock market because I already owned the Vanguard 500 Index Fund.  The third fund that was added was the Vanguard Total International Stock Market Index Fund (VGTSX) for international exposure.

My asset allocation was:

Vanguard 500 Index Fund – 60%

Vanguard Extended Market Index Fund – 15%

Vanguard Total International Index Fund – 25%

As far as equities are concerned, my new portfolio was diversified.  It contained every major publicly traded U.S. and international stock.  In my mind, I was ready for the new century and another decade of 20% annual returns.

It did not take long for things to change for the worse.  In March of 2000, the dot.com bubble burst.  On September 11, 2001, New York City and Washington D.C. were attacked by terrorists.  By 2003, the U.S. was fighting two wars in Afghanistan and Iraq.  Those unfortunate events drove the U.S. economy into an extended recession.

As the result of those events, the stock market posted losses for three consecutive years.  The average annual  return on my portfolio was a loss of -16%.  In other words, if I invested $100 in January or 2000, it was worth $61 by January of 2003.

How did I handle the prolonged recession and market contraction of the early 2000s?  Honestly, I stayed the course.  I dollar cost averaged the same amount of money into my investments every month.  My goal was to reach financial independence, so I rode out those volatile markets and took advantage of buying equities at a reduced price.  I would, however, feel unnerved when I paid attention to the media.  Fortunately, I was too busy working and going to college to become obsessed with the media.  I honestly do not remember ever feeling overly panicked during this period.

My patience did ultimately pay off.  By sticking with my allocation, I was rewarded handsomely between 2003 and 2007.  Over the course of those next five years, my portfolio had an average return of more than 16% per year.

During my first 10 years as an investor, my portfolio returned slightly more than 8.5% per year.  This asset allocation, however, was extremely volatile.  The best year returned 34% and the worst year had a loss of -20%.

An asset allocation of 100% invested in stocks is not suited for every investor.  It worked for me because I was young and able to dollar cost average when the market was both up and down.  This type of volatility does cause many investors to sell low and buy high.  That is a losing game if you want to reach financial independence.  If you cannot honestly handle a -40% drop in the value your portfolio, then a portfolio made up of 100% stocks might be too aggressive for you.

There is a simple solution if the volatility of a portfolio invested in 100% stocks causes you to feel insecure.  Add a percentage of bonds to your portfolio that matches your risk tolerance.  In my next post, I will write about how adding bonds to my asset allocation reduced the market volatility of the next decade.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

11 thoughts on “100 Percent Invested in Stocks

  1. Full Time Finance

    The vast majority of people can not handle 100 percent stocks. And yet the number of people following that approach seem to be raising every day as the bull market gets long in the tooth. I do worry how many more people will give up on investing forever after the next crash.
    Thanks for the reminder.

    Reply
    1. thefinancialjourneyman Post author

      Thanks for your comment on my blog.

      I share the same concerns for others that you do.

      Nobody knows when the correction will come, but we all know it is coming.

      For me, it was not a big deal when I only had 1-2 times annual expenses invested.

      I don’t want to take a -40% loss now that I have 15-20 times annual expenses invested.

      That is just my comfort level.

      It is an individual tolerance level.

      Reply
  2. Mustard Seed Money

    I’m 100% in equities. While I didn’t love the dip from 2007-2009 I held on tight and am glad that I did 🙂 For me I slept fine at night but I know plenty of people that were super worried.

    Reply
  3. Mrs. Groovy

    I definitely had the stomach for it but Mr. G didn’t. The highest we were at in stocks was about 70%. Now we’re 40/60 stock/bonds + cash since we’re no longer working and those first few years of retirement are the most critical.

    To go 100% I believe you need to be in it for the long haul and be willing to ride it out if all tanks – just as you did. Well done!

    Reply
    1. thefinancialjourneyman Post author

      Thank you for commenting on my post.

      Yes, I too am past that aggressive of an asset allocation.

      It was a good experience when I was in my 20s and it helped me reach a goal.

      We are planning on retiring in about 11 years, so it is not suitable at this point.

      Reply
  4. Brad - MaximizeYourMoney.com

    I’m 100% invested in stocks right now. Lately though I’ve been considering adding bonds into the mix. The reason is that I can live of 3.5% of my portfolio right now. So I don’t “need” 10% returns. Getting only 7% returns because of adding bonds, but lowering volatility, still gives me the amount I need after inflation. Of course I’ve been kicking around the idea for a couple months now and haven’t pulled the trigger. Not sure what I’m waiting for. I think I’ll shift about 10% soon. I’ve run the numbers and even with 40% bonds my Monte Carlo results have me 90% okay until 97. Pretty good odds.

    Reply
  5. Liz@ChiefMomOfficer

    I’ve been through the dot com burst and the Great Recession, and I’ve always had a percentage in bonds. I know people who are 100% in equities, but I’m not comfortable taking that risk. Right now I’m around 80/20 overall, and that seems aggressive to me given my age (37).

    Reply
  6. Miss Bonnie MD

    I’m also 100% equities. IMO the risk is only if you cash out in a down market. And obviously this is for long term investing, not anything short term. We want out money to grow, not stay stagnant because of fixed income to make us feel better about risk.

    Reply

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