The common wisdom is to split your liquid investment funds among different asset types, such as stocks, bonds, money market instruments and such.

Should you put 100% of your investment funds in the stock market?

However is this right for everyone?

Of course not.

If you have an ultra-long time frame, such as 25 or more years, then it may be prudent and preferable to invest entirely in stocks, because stocks have historically delivered significantly higher returns than any other investment class over the long term.

But if you decide to go this way, be warned that, if history is anything to go by, you’re in for a stomach-churning ride. A prime example is the 42 year period from 1970 through 2011. If you had gone the all stocks route, you would have enjoyed about a 10% annualized return. Not great, but not too bad either.

However that one number hides some pretty scary monsters behind it. For instance, in 1974 the market lost about a quarter of its value. Think about how you would feel if you lost 25% of your wealth in less than a year. Would you get out of the market and vow never to return?

Or take 1990, please! In 1990 the market lost about 15%, and who can forget the infamous dot-com bust of 2001 and 2002 where some people lost 80% or more of their money. And last but not least is the global economic crisis of 2008 and 2009.

An all stock portfolio would have come out okay in the end, however there’s no guarantee most investors would have had the discipline or the fortitude to stay invested after experiencing those periods of mind-numbing losses.

And you would have had to stick to a solid strategy, such as value investing or purchasing low-cost index funds, in order to make the numbers work. Don’t forget, there were quite a few people who purchased stocks without any risk-reduction safeguards in place and lost everything.

I’m personally a fan of an all-stock portfolio because I’m naturally diversified over real estate, business and stocks. However if you’re renting your home, don’t have any real estate investments and aren’t building a business you can later sell, you might want to think twice about holding 100% of your portfolio in stocks.

As William Bernstein says, “There are a lot of people out there who think they can tolerate an all-stock portfolio, but when the ottoman hits the fan, they’re not quite as disciplined as they thought.”

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