If you’re already retired, it may be time to rethink the role that stocks and bonds play in your portfolio. While conventional wisdom suggests that investors should shift more assets to bonds as they approach retirement, I insists that investing in stocks (instead of bonds) is the best asset allocation for retirement.
In my years of investing, I examined market data from the last 80-plus years and determined that portfolios invested 100% in stocks allow retirees to safely withdraw more money each year than those who have a portion of their portfolio invested in bonds. Stocks have consistently led to more capital appreciation than moderate and conservative portfolios reliant on bonds.
History’s lesson is straightforward: the more stocks, the better. Investing entirely in equities consistently generated either the highest safe spending rate for a given 30-year period, or a rate that wasn’t far off the mark. What’s more, all-stocks portfolios were much likelier to deliver a happy surprise than to disappoint.
Why Stocks Are Preferred
Because preserving spending power is often more important for retirees than actively growing their portfolios, bonds tend to play a significant role in many retirement strategies. Stocks, on the other hand, can carry more risk and be less attractive to retirees.
Why Conventional Wisdom Points to Bonds
Various rules of thumb dictate that investors should reduce risk in their portfolios as they near retirement by increasing their exposure to bonds and decreasing their exposure to stocks. For example, the 60/40 rule suggests a retiree’s portfolio should be 60% equities and 40% fixed-income securities. According to the rule of 110, another popular asset allocation guideline, a person’s equity exposure can be calculated by subtracting their age from 110. The resulting figure dictates how much of a portfolio is invested in stocks versus bonds. For instance, a 65-year-old following the rule of 110 would invest 45% of their portfolio in equities and keep the remaining 55% in bonds.
After two decades of market observation, I found the aggressive and moderate options supports higher safe withdrawal rates than the conservative portfolio. A safe withdrawal rate is the highest amount that can be removed for all 30 years of the simulations without depleting the portfolio in at least 90% of the time.
Bottom Line
Retirement doesn’t mean investors should rid themselves of stocks. Portfolios that contain stocks can support higher safe withdrawal rates than those dominated by bonds, and result in significant surpluses even after 30 years of retirement spending. While past results don’t guarantee future performance, equities should play an even larger role in the investment portfolios of retirees.
Should the future resemble the past, the lesson will remain valid. Retirees should invest heavily in equities, most likely more than they currently do.