What it means
Shares (equities) have historically offered higher long-run returns than bonds or cash, but with much more volatility, which is the size of the ups and downs in value. A portfolio made up wholly of equities has no steadier assets to cushion a fall, so it takes the full impact of a market downturn.
Supporters argue that for young investors, or for money that will not be needed for decades, the extra growth outweighs the risk. They point out that a long horizon gives markets time to recover, and that a bond allocation may drag down returns when the goal is far away.
Historically, major market falls have been followed by recoveries over long periods, although no outcome is guaranteed. Critics point out that the strategy depends on more than a long horizon.
It also depends on an investor's behaviour, because someone who sells in a panic after a 30% fall turns a temporary loss into a permanent one. A full-equity portfolio can still be diversified across countries, industries and company sizes.
Holding a global index fund, for example, spreads money across thousands of businesses, though it remains fully exposed to the overall direction of the stock market. Variants include a core of equities with a small cash buffer for emergencies, or a lifecycle approach that begins with 100% equities and gradually adds bonds as the investor approaches retirement.
Many target-date funds follow the second pattern. The planned shift towards safer assets over time is known as a glide path, and it is what separates these funds from a fixed 100% approach.
Anyone considering the strategy should test it against their real circumstances. Key questions include how soon the money will be needed, how stable their income is, and how they would react to seeing the portfolio value drop by a third.
In practice
Real-world examples.
Example
A 28-year-old software engineer invests $1,000 a month into a global equity index fund within her retirement account. She has a steady income and 35 years to go, so she is comfortable with the swings. She reviews the allocation once a year rather than reacting to the news. When markets fall she keeps contributing, which means each monthly payment buys more shares at the lower prices.
Example
A retired couple considers moving their entire $600,000 portfolio into shares to chase higher growth. Their adviser shows them that a 30% fall would cut their savings by $180,000 just as they begin withdrawals. They decide to keep three years of spending in cash and bonds.
Example
A family-owned engineering business invests a long-term endowment, set up to fund scholarships, wholly in equities. The trustees accept that annual returns will be volatile because the payout is based on a multi-year average. They hold a separate cash reserve to cover grants during a downturn.
Formula
Calculation
Value after a fall = Portfolio value x (1 - percentage fall)
Gain needed to recover = Loss / Value after the fall
Suppose an investor holds $400,000 entirely in equities and the market falls by 30%. The loss is 400,000 x 0.30 = $120,000, leaving 400,000 - 120,000 = $280,000. To get back to $400,000 the portfolio must gain 120,000 / 280,000 = about 42.9%. This is why large falls take disproportionately long to repair.Case study
Seen in the real world.
Windrose Capital is an illustrative, fictional advisory firm that presents two clients with a choice. Client A is 30 years old and Client B is 62, and each has $500,000 to invest, with Client B planning to retire at 65.
The firm's analyst models a 35% market fall in the first year. Client A would see $175,000 vanish on paper but would have decades of contributions and recovery time ahead, while Client B would face the same loss just before drawing an income.
On this basis Windrose recommends a 100% equities strategy for Client A and a 60% equities mix for Client B, with two years of Client B's spending held in cash so that withdrawals never force a sale of shares in a falling market. The illustrative lesson is that the strategy is not good or bad in itself, because its suitability depends on time horizon and capacity to absorb losses.
Watch out
Common mistakes.
- Assuming that a long time horizon makes losses irrelevant, when investors who sell during a crash lock in the loss.
- Believing that owning many shares removes market risk, when diversification reduces the risk of individual companies but not of the whole market.
- Forgetting to keep emergency cash outside the portfolio, which can force a sale of shares at a bad moment.
Questions
People also ask.
Is a 100% equities strategy suitable for retirees?
It is usually considered too risky for people drawing an income from their portfolio, because poor early returns can permanently reduce what they can spend.
How is a 100% equities strategy different from an aggressive portfolio?
An aggressive portfolio may still hold some bonds or alternatives, whereas a 100% equities strategy holds shares only.
Can a 100% equities portfolio be diversified?
Yes, across countries, sectors and company sizes, although every holding remains tied to the general direction of stock markets.
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