Guest Author - Guido Deboeck

How many certified financial planners or advisors do you know that would make a strong case for allocating 100% of your assets to equity investments? Probably none. Nevertheless with some qualification a strong case can be made for doing just that.

Let’s start by distinguishing between age groups: college and graduate students are the Y generation; the working years from 26 to about 50 are the X generation; the early retirement age from 50s to mid 60s are the baby boomers; and those 65 and over are seniors.

The Y generation has the least to loose. If they would invest all their savings (usually less than $10,000) in the stock market and if by any chance they were to encounter another down cycle that takes away 45% (as was the case in the period 2000 to 2002) then the most they would loose is maybe the equivalent of one semester of tuition. In addition, if they learn to invest smart early on, the gains may be unimaginable.

In the last 50 years, a 100 percent stock allocation generated average annual returns of 10.44%. Anything less than 100 percent, say 60 percent equity and 40 percent bonds and cash, has resulted in average annual returns of 9.09 percent. This 1.35% difference over a period of 25 years makes a 40% difference in capital (or over $207,000 based on initial investment of just $10,000) at the end of 25 years.

Over the years the X generation earns more capital to invest and hence the risks of loosing a significant part are greater. A sudden market turndown as the one we experienced, may affect your standard of living. Hence you probably do not think about a 100 percent solution. Nevertheless a 100 percent allocation may be the best if you consider a broader definition of equity investments. Mortgage payments are adding to your equity in your house. Since current mortgage rates are less than the average increase in housing prices, an investment of up to 25% of your income into mortgage payments for a house is a good equity investment. When kids move into the picture there will be more expenses for schooling but also a greater need for saving for college years. What better investment to make than investing in schooling and college education for the kids? In sum, if 25% goes into the house, 25% into education and the rest into stocks, one could still think of it as a 100% allocation to equity investments.

The baby boomers and those who are in their early retirement years benefit from relief from mortgage payments but maybe struggle with the reduced pension income, potentially huge college expenses, and more expenses for leisure activities (vacations, golf, tennis lessons…). With more time on their hands they also can be more active in the markets, apply proper buying and selling techniques, avoid significant losses. Assets should be in stocks when the market direction is favorable, if it is not they can be shifted temporarily into cash. In short, baby boomers and early retirees have no excuse not to adopt a 100% equity solution.

Most financial planners would argue that people 65 years and over should invest 60 percent of their assets in equity and 40 percent in bonds and cash. This is the dummest advice one can think off to give to seniors who have no need to supplement their pensions. With average life expectancy now 80+ years, and still increasing, people who are 65 or over should only consider the 100% equity solution because the difference in return mentioned above can make a significant difference in the capital they can handover to their grand-children.

For example, say someone has saved $100,000 by age 65. If invested 100% in stocks over 20 years, this may produce about 3/4 of a million dollars. Given average cost of just one year in college today ($25,000) and cost of college expenses growing at 7% per year, 25 years from now one year in college would amount to $135,000; four years in college will cost half a million dollars. Hence three quarters of a million generated by the 100% equity allocation would allow seniors to pay for only half of the college education of two to three grandchildren. Any other allocation would fall far short of that.

The 100% equity allocation may require guts in the minds of some and is by no means the allocation you will hear from most financial planners. For them so sustain and expand their business they will provide a solution that requires regular adjustments... If however you think it through, the best allocation that produces the highest returns over the longterm remains the 100% allocation to equity investments. That is if you did the right thing when you were young, you allocated a significant portion of your earned income to housing and education, and if as a baby boomer or retired senior you keep in mind the likely cost of college education for your grandchildren.