Should You Stop Buying Bonds Forever?

When it comes to building a nest egg, financial pros generally recommend that folks invest in a mix of stocks and bonds. But is an all-stock portfolio a better choice?

Yes, say researchers at three U.S. universities.

Eliminating bonds from your portfolio, switching to a mix of 50% U.S. stocks and 50% international stocks, and then holding on over your lifetime “vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests,” according to the researchers.

The researchers looked at investing returns from 1890 to 2019 in five countries — Denmark, France, Germany, the U.K. and the U.S. — in reaching their conclusions.

How much could your nest egg swell with an all-equity approach? According to the researchers from Emory University, the University of Arizona and the University of Missouri at Columbia:

“Given the sheer magnitude of U.S. retirement savings, we estimate that Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.”

The researchers acknowledge that investing purely in stocks and avoiding bonds can result in large short-term losses when markets tumble. But they say helping investors ignore these temporary losses and encouraging them to stay focused on the long-term — such as by providing “financial education on staying the course” — is likely to pay off over time.

Recommending an all-equity portfolio is definitely an outlier position. Instead, most financial advisers urge their clients to hold both stocks and bonds in their portfolio.

As the researchers acknowledge, advising clients to build a nest egg consisting of a mix of stocks and bonds is “close to being uniformly given and universally followed.”

Money Talks News founder Stacy Johnson echoes one of the most common recommendations financial advisers make to clients in terms of asset allocation:

“I suggest subtracting your age from 100, and putting no more than the resulting percentage of your long-term savings into stocks. So if you’re 25, 100 minus 25 equals 75 percent in stocks. If you’re 75, you’d only use stocks for 25 percent of your savings.”

However, Stacy also emphasizes that this approach is just a rule of thumb. No two investors have the same financial situations, so the right investment approach for one person is likely to be wrong for someone else.

If you are unsure about the specific asset allocation that makes the most sense for you, consider sitting down with a financial adviser to discuss your situation.

You can also start the investment education process by reading “14 Simple Strategies for Building Long-Term Wealth.”