Whatever your age, how much of your investments should be in equities? Should it be 30 percent? 60 percent? 90 percent?
No less an authority than Warren Buffett has stated that 90 percent is the right answer. That's a level of investment in stocks that many investors, not just older ones, find dangerously uncomfortable, particularly when the stock market is as volatile as it has been lately. Yet Buffett, the most renowned investor of our time, established a trust for his wife that puts 10 percent of his bequest in short-term government bonds with the remainder invested in a broad-based stock index fund.
But even Buffett's advice may be too conservative. Indeed — except for known, near-term financial obligations like a large tax bill that you might owe on April 15 or a down payment on a house you're buying in the next few months — the best asset allocation, nearly all the time, is 100 percent stocks.
You may wonder if I put my money where my mouth is. I do. As long ago as the late 1970s, I was investing 95 to 100 percent of my liquid assets in common stocks. This didn't change even when I ran the bond department at my old firm during the 1980s. And it remains true today.
If one of my clients happened to ask me what I thought their proper asset allocation should be, I would tell them that, despite my job, I was almost 100 percent invested in stocks myself. I even suggested that they take away the money we were managing and turn it over to our firm's equity money managers.
Many investors simply cannot stomach the volatility that a 100 percent equity portfolio entails. And, so, what I actually say to people who ask my advice is this: Put as much money into the stock market as you can stand. One hundred percent is best, but even if you are very risk-averse, allocate at least 75 percent to stocks.
There are reams of data showing the superior performance of the stock market over many generations. In the last 90 years, according to Morningstar, stocks have outperformed long-term Treasury bonds, on average, by 4.4 percentage points a year. They have done even better against intermediate- and short-term Treasuries, 4.8 and 6.6 percentage points.
That kind of performance edge (compounded) really adds up. Let's say you invest some money in stocks halfway through your working career (say, at age 45) and spend those particular savings halfway through your retirement (say, at age 75). If your investment does 4.4 percentage points better per year than the next person's, you will have more than three-and-a-half times as much money to spend as they will.
Of course, "past performance," as we are constantly reminded, "is not necessarily indicative of future results." And that's true: For a variety of reasons, I think you should not expect a broad portfolio of stocks to outperform bonds by as much in the future as they have in the past.
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So, is there some other justification besides the reams of data? Consider this:
• Money invested in a U.S. total stock index fund will be used to buy shares of thousands of companies in dozens of industries. At this writing, every $2 million represents an ownership interest of approximately one-ten-millionth of almost the entire United States economy.
Economic potential never drops because knowledge — the main source of per capita growth — always rises. Technology (knowledge embedded in machines) gets better because we invest in research and development and never (at least intentionally) replace a good machine with an inferior one. Moreover, the capability of the average worker (knowledge embedded in our brains) keeps rising because average educational and training levels continue to rise.
• But what if the absolute worst happened? A pandemic of epic proportions, a nuclear holocaust or the Earth is hit by an asteroid?
Yes, your stocks will collapse but your bonds will be worthless, too. If there is no functioning modern economy, the government will not be able to pay its debts. And if you're still around, you'll have bigger things to worry about.
David A. Levine is a former chief economist at Sanford C. Bernstein & Company, now a unit of AllianceBernstein, who also founded and ran the firm's fixed-income department.