In this week's episode of Friends Talk Financial Planning, John Scherer and Bridget Sullivan Mermel discuss the pros and cons of investing 100% in stocks. They address why it may not always be the best approach, despite stocks having high expected returns. Join the conversation as they analyze historical data and share insights on long-term investment strategies.
Article with the 7 Reasons Not to Use a 100% Stock Portfolio: https://www.whitecoatinvestor.com/100-stock-portfolio/
John's firm website: https://www.trinfin.com
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TRANSCRIPT:
John: We recently had a viewer ask why it wouldn't make sense to just invest everything you have in stocks, because those have the highest expected returns. We'll talk about that on this week's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. And before we start talking about investing 100% in stocks and what the pluses and minuses of that are, please subscribe. We're trying to get to a thousand subscribers, and you can help. Thank you.
John: That's right. So let's talk about investing. And we don't focus on investing a lot because it's only one of the things that a good financial planner puts together. But I think it's a really great question. Hey, over time, stocks have outperformed bonds. I'll pull up a quick thing here. This is over the last almost 200 years. And it talks about what stocks have done versus bonds versus gold. And you go, “Oh, that's a pretty compelling story. Stocks really do well over time.” And as a side note, I like this little graphic when people talk about gold and how that's going to be such a great hedge against inflation.
Gold has its place, but you look at over a 200-year period and that's not such a hot return. So that's a conversation on the other side of things. But why not stocks then? And we know stocks are risky. And this person said, “Hey, listen, I'm willing to go up and down, but my goal is to have as much growth as I possibly can have over time.” So I'm interested to hear what you have to say about this, Bridget, but I thought maybe I'd just share my ideas and some of the communication that I have with clients. And talk about why we don't typically recommend all stocks and where it can make sense.
And I'll pull up a chart that compares stocks and bonds over 15-year periods. And maybe before we even pull the chart up, just say that the reason why I don't recommend that is we can go long periods of time where stocks don't outperform bonds or cash. We looked at the first graphic, over 200 years. Yep. Long periods of time. But long is like 50 years, 75 years, 100 years. So here we'll pull up this chart where this is a study that goes back to the 1940s, and it compares the five-year treasury bonds.
So, a shortish term bond to the S&P 500 over 15-year periods. Each data point is the pre trailing 15-year period with things. And take a look at the middle bottom here, we've got the 0%. If it's at zero, that means that stocks and bonds were exactly equal. And if it's below that, that means that bonds actually outperformed, or stocks did worse. There's not an insignificant number of cases on this chart that are at or below zero, meaning stocks did the same or worse than bonds, with a lot more ups and downs with things.
Bridget: Yeah. And it's hard to remember this because in the last 10 years, maybe 15 years since the downturn, stocks have been doing generally well.
John: Really well.
Bridget: Not every year, but we've had a nice run. And so, it can be hard to even remember when it wasn't like this.
John: Right. And it's a recency bias. You kind of forget what happened 10, 15, 20, 30 years ago. And the other thing about this is that we haven't seen it recently here. Actually, take a look back on 2012 and 2014. Here we are talking about 15-year periods. The other thing is that it’s hard to think in 15-year timeframes. You go, “Oh, stocks have done well the last 15 years.” But remember, that's the previous 15. You go, “Oh, that's right.” I have a hard time remembering what happened yesterday, much less 5 years ago, much less 15 years ago, and how it looked.
When you take a look at these longer-term things and think about what this chart means, think about going back 15 years. Think about where you were, where we were 15 years ago and, listen, as of today, I would have as much or more money if I had just bought five-year CDs as if I had invested in the market, and went through all the ups and downs of the tech bubble and the credit crisis. Fill in all these things and the ups and downs of that, and I would have been the same thing if I just put my money into boring five-year CDs or five-year treasuries.
And maybe I've had more money over 15 years later. You think about what that means. I mean, it's long-term. You think, “Oh, I've got a long-term time horizon. I have ten years before I need to use this money.” Ten years is a long time as an individual. Ten years ago, I had to hair practically😊 But from an investment standpoint, these things can go for a long period of time. It's really hard to judge those or to internalize what that means when we're talking about 15 years from now, your money being worth less than it is today compared to being in a cash, basically.
Bridget: So let me use some examples.
John: Yeah. I love it.
Bridget: When COVID started, the stock market went down 25%. And we had calls with clients. How are you feeling? How's it going? Is everything okay? There was so much going on, so it was a great time to touch base with people. But most of the people, except for one or two, didn't need to be talked off the cliff. But the thing is that turned around in a few months. It didn't stay 25% down for a long period of time. Recently, the stock market was down 10% for around a year.
And I got a call or two in which people asked, “Why isn't it high? It's supposed to be high.” And we do a lot of talking to people about the ups and downs. You can understand that intellectually, but then when you actually see your bank account, you feel it emotionally, and it might not feel good. So what you're saying is that I would have to be looking at my investment account for 15 years and see nothing happen.
John: That's the potential.
Bridget: And that I would not be coming back to you if you were my advisor, saying, “Hey, John, I don't believe in stocks anymore. This is giving me nothing. I'd be better off in a savings account.” It would seem to me that it would be a rational conclusion. It wouldn't be a crazy idea to say that after 15 years.
John: Right.
Bridget: So that's what you're saying. That's what I see.
John: And I don't disagree with you. But you are saying it would be logical to think, “I've been in 15 years. Come on, guys. When's this gonna get ahead?” But take a look at the data. What I talk with folks about is when you're in stocks, you need to be prepared that there are going to be 15 year stretches where you could have done better by putting the money in CDs. Is it most of the time? Absolutely not. Look at the chart. Most of the time you're better off in stocks. Go back to that first chart we looked at. We don't even need to pull it up. You have five gazillion dollars compared to $500. But there are times when this is not the case. Is it 10%? Is it 20%?
Think about it. For 20% of the time, you'd be better off just being in cash. The problem is, we don't know which 20% of the time it is, until after it's already done. And we talk about, hey, does it make sense to even invest in stocks? Well, let's say if 20% of the time you're better off in cash or bonds, but 80% of the time you're better off in stocks. And when you're better off in stocks, you're much better off. You can sort of flip this conversation. On the other side, we have some people say, “Let's just be all. Why be conservative?” You go, listen, four out of five years, we're going to be in really good shape.
Four out of five 15-year periods we are going to be in good shape. So we need to bet on the one that's got the 80% odds of coming. But do we go all in on that and never look at anything else? Well, no, we got that 20%, one in five chances that it's going to underperform over a long period of time. It's just so hard. These are two sides of the same coin. We had a person ask this question. And we love the questions. If you guys have questions, we’d love to hear them. Why not all stocks? It certainly seems to make sense and to the extent that you can be Rip Van Winkle and never pay attention to it for 50 years. Yep, that makes sense.
The problem is it's just really hard to do that. And we don't know when those times are coming. And we talk a lot on our show about what are the facts. It's just hard to really understand or find clarity on what's going on out there. And I think this conversation shows that there are times and there are extended times—long periods of time—that you could be underwater. And knowing that helps, I think, to balance the conversation by making us say, “Oh yeah, I forget how risky these stocks really are.” We're getting good returns most of the time, but we can go for a decade, a decade and a half and be underwater, basically.
You think about how emotionally powerful that is. You go, “Geez, I'm comfortable with ups and downs.” But I love how you described it when we went down 25% in 2020, but then it's back in six months. We had conversations with folks back at that time about going back to 2007, 2008, 2009 and the credit crisis where it went down 25% and then it stayed down, and it went down some more and it stayed down. And then think about what that means. We look at a chart like we pulled up before, and it goes down and then it comes back up. Well, we know that looking at it in the rearview mirror and yep, I believe that that's going to be the case.
But when you're in the middle of that, it doesn't always feel like, “Oh, yeah, that's right. It's just fine.” And I go back to 2007, 2008, 2009 when the market was down, and it stayed down. Now we're 18 months in and it's still down 20%, 30%, 40%. And it's not like saying, “Well, my money's down, but everything else is fine.” No, my money's down. Unemployment's at a record high. Income is slow. The oldest bank in America went out of business. The largest insurance company in the world almost went out of business and had to be bailed out.
All these things are going on and my money's down. Now suddenly it’s much worse. It's not just, “Oh, my money's down. It's on a nice little chart.” It's a different feeling when you say, “The world's going to h*** in a handbasket and my money is down and what are we going to do?” That's the stuff that's hard to think about in advance, but it's useful to remember and look at these things so you can make good decisions.
Bridget: That’s why as people get older, we have fewer stocks. So the 80/20 portfolio is generally the most aggressive that we will recommend: 80% in stocks and 20% in safe stuff. But as you get older, we expand the safe stuff, because you might need to go through these long periods, and you don't have the resources to earn your way back into higher net worth. So that’s why we recommend it. And it's been interesting for me in the industry because it seems like it gives people a softer ride, and they appreciate it.
John: That's a great place to wrap things up. Again, we love questions from viewers. Please keep them coming. We love talking about things that are meaningful for you guys. And with that, I'm John Scherer, and I run a fee only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial advisory practice in Chicago, Illinois. Both John and I are members of ACP or the Alliance of Comprehensive Planners. You can check out acplanners.org to find an advisor in your area.
John: And don't forget, hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.