For a while, many financial advisers have been telling young investors to allocate most of their money--usually 401(k) money--to stocks. The idea: With decades of tax-free growth ahead, compound interest can work its magic and market dips won't matter over such a long period of time. Some even go as far as to recommend a 100 percent stock portfolio [read more about mine here.]
But lately, a growing chorus of financial gurus--including Andrew Lo, director of MIT's Laboratory for Financial Engineering--are saying the all-stock plan isn't the best idea going forward (Lo believes that portfolios need more asset classes than just stocks and bonds.)
Recently, I asked two financial advisers for their thoughts on the 100 percent stock portfolio.
- Jeff Layman CIO of BKD Wealth Advisors, a wealth management firm headquartered in Springfield, Mo., says it all depends on the person. "100 percent equity will get you a pretty big bang for the buck. Obviously with stocks trading at half the levels of 14 months ago, there's a much stronger argument for equity now. But there's benefits in adding other asset classes in small doses. It's important to remember that the last 10 years show that you can have some tough periods over an extended amount of time." Layman recommends using bonds not just to dampen risk, but also as a diversifier. REITs and commodities don't appear on the menus of most retirement plans, so bonds are probably the best diversifier in 401(k)'s, he says: "It would be practical to put 20 percent in bonds as a diversifier."
- Dean Barber, president of Barber Financial Group in Lenexa, Kan., says because the economic landscape today doesn't resemble anything we've seen in the past, the stay-the-course route doesn't necessarily apply anymore: "The long term doesn't look OK. A year ago, we started getting much more conservative, and now most of our client portfolios don't have more than 15 percent exposure to the overall market. My advice is that people need to understand the true risks of investing. Unfortunately, people who cut their teeth between 1982 and 2000--they had 18 years with one negative year--people think that's the way it goes, but that's an anomaly." Today is the reality: protect first, grow second. Barber cautions against hoping for a quick recovery. (Keep in mind that the client portfolios Barber alludes to are generally those of older, high-net-worth individuals.)