An all-equity portfolio “barely produces better returns than a mix of stocks and bonds,” writes Mark Hulbert in last week’s MarketWatch. This isn’t a prophecy of an imminent bear market, he says, but rather is based on years of data spanning the last 90 years (provided by Ibbotson–a division of Morningstar).
The data shows that, since 1926, a 60/40 stock/bond portfolio would have produced an 8.6% return, only 1.4 percentage points lower than the 10% annualized return of an all-stock portfolio. Over the past 20 years, he says, the difference has been even smaller.
This begs the question as to whether the modest margin justifies the additional risk inherent in an all-stock portfolio, particularly given the tendency for investors to “throw in the towel” when equity losses accrue. Hulbert says that while some argue that past performance of a 60/40 portfolio isn’t relevant for the future given today’s low interest rates, “there is no significant historical correlation between interest-rate levels and the relative subsequent performance of an all-equity portfolio and the 60/40 portfolio.”
Hulbert offers a stinging quote from Claude Erb, a former fixed-income and commodities manager at mutual fund firm the TCW Group: “The people who can truly stomach the volatility of a 100% stock portfolio are either catatonic or dead.”