Investing rules of thumbs, like maintaining a portfolio made up of 60% stocks and 40% bonds, can make for a helpful starting place when putting your money to work in the financial markets. But financial advisors say that for many young investors with decades until retirement, it makes sense to bump that stock allocation up significantly—perhaps even to near 100%.
Jake Dempsey, 22, is one of those young investors. The senior business administration major at the University of Scranton in Pennsylvania maxes out his Roth IRA every year before putting additional funds to work in a taxable account. He has both accounts 100% invested in equities. With no house and no children, Dempsey says he wants to invest aggressively in stocks now, since he knows he won’t be able to do that for his entire life.
“I’m in a position where I can take extra risk,” Dempsey says.
Every investor’s situation is different, and before people of any age consider investing, they need to take care of some housekeeping: building up an emergency fund and paying off high-interest credit-card balances. But after that, the stock market is a powerful tool to save for a comfortable retirement. The average annual return for an all-stock portfolio invested between 1970 and 2022 was 10.4%, compared with 9.3% for a 60/40 portfolio, according to an analysis by
Assessing your goals
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Most young investors should have at least one account, ideally a Roth individual retirement account (IRA), dedicated entirely to stocks, says Josh St. Laurent, CEO of planning firm Wealth In Yourself. Roth IRAs are funded with after-tax dollars meaning the gains aren’t taxed after age 59 1/2.
While retirement is often the main objective, most investors have multiple goals for their money, like buying a house, sending a child to college or planning a wedding or vacation. Because of that, deciding how much of a portfolio should be made up of stocks isn’t solely dependent on the age of the investor, but rather on the purpose of the funds, St. Laurent says. A young client may opt for a conservative allocation in an account intended for a car in the next year. Meanwhile, an older client might maintain an all-stock portfolio designated for inheritance purpose.
Dedicating at least one account entirely to stocks allows a young investor to earmark the account for future goals, St. Laurent says. It also lets the investor learn about the dynamics of the market and how to keep calm during times of volatility.
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“If you get invested in stocks early, you’re building a muscle of being comfortable with that level of risk,” St Laurent says.
When bonds fit in
Bonds’ benefits really kick in when retirement is on the horizon, says Brad Lineberger, founder of Seaside Wealth Management. Investing your cash in bonds before then means missing out on the higher upside potential of stocks.
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“Bonds help smooth the ride and reduce volatility, and act as insurance against someone selling during volatile down markets,” Lineberger says. But they’re an expensive form of “insurance”. “I would rather educate a young person on how the market works, set their expectations that volatility is normal, and then use stocks and no bonds.”
Investors with all-stock portfolios will have to shift some of their holdings to bonds eventually. The conversations around how to make those changes usually start happening around 10 years before retirement, with the actual buying and selling taking place roughly five years before you ditch your nine-to-five, Lineberger says.
Diversification still matters
An all-equity portfolio can be a sound strategy for young investors with long-term objectives, but it’s still important to diversify, says Laura Mattia, a financial advisor and CEO of Atlas Fiduciary Financial.
It may be tempting to go all in on large-cap U.S. stocks like
and
Amazon
,
which climbed 37% and 19% during the first quarter of this year, respectively. The
experienced its best first quarter since 2019.
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But spreading out your portfolio across different types of investments like international equities, small-cap stocks and real estate investment trusts (REITs) cannot only boost the resilience of a portfolio but also enhance its returns, Mattia says. Over a 15-year investment horizon, small-cap stocks worldwide have historically outperformed their large-cap counterparts 90% of the time, according to an analysis published by
Morgan Stanley Capital International
(MSCI) last year. More specifically, MSCI’s World Small Cap Index has seen an annualized excess return of 2.69% since 1998 compared with the firm’s World Index of large- and mid-cap stocks.
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And while the U.S. market may appear richly valued today, market timing can be challenging, Mattia says. For long-term investors, she adds that staying invested through market cycles will lead to better outcomes than staying away from the market because of its current high prices.
For young investors looking for a place to put their money to work for years and leave it be for those various market cycles, Lineberger points to total market funds. These funds aim to mimic the performance of the stock market at large, taking the guesswork out of investing.
“You don’t know if the performance is going to show up from small companies, medium-sized companies or large companies,” Lineberger adds. Owning a total market fund means, “you’re giving yourself the best odds of having exposure to whichever companies do really, really well.”
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