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RECENTLY, A READER—let’s call him Tom—posed this question: If stocks historically have delivered far better returns than bonds, then why should an investor own any bonds at all? Even with the stock market’s unpredictable ups and downs, wouldn’t you end up way ahead by betting only on stocks over the long term?
It’s a fair question. Over the past 100 years, stocks have delivered returns of roughly 10% per year, while bonds have returned just 5%. More recently, that gap has been even wider. Between 2016 and 2025, the S&P 500 gained nearly 15% per year, on average, while bonds gained less than 2%. And as we’ve experienced in recent years, bonds aren’t without risk, so why not just go all in with a 100% stock portfolio?
The most common answer to this question involves a phenomenon known as sequence-of-returns risk. That’s the risk posed to retirees by an unpredictable stock market. Suppose, for example, you retire on a Friday, and stocks drop the following Monday. This would, of course, be unnerving, but it could become a real problem if you’re forced to sell stocks while they’re depressed. Too many forced sales can cause a portfolio to deplete too quickly.
Tom, the reader who posed this question, is an experienced investor and well aware of sequence-of-returns risk. His view, though, is that it’s a fear that’s overblown. Even if stocks drop from time to time, he argued, the impact should be modest. That’s because the loss an investor actually experiences in any given year would be limited by the amount withdrawn in that year.
Suppose, for example, a retiree is taking withdrawals at a 4% annual rate. Even if the market were to drop 50%, that 50% loss would only be applied to the 4% withdrawal, resulting in a loss of just 2%. And since the stock market has delivered such superior performance overall, Tom asked, shouldn’t that more than offset single-digit losses like this, especially if they occur only every once in a while?
It was a good question, so I ran the numbers, starting with a period that was particularly punishing for stock market investors: In 2000, the U.S. market dropped 9%. In 2001, it dropped a further 12%, and in 2002, it dropped yet another 22%.
What would’ve happened if you’d retired at the beginning of 2000 with an all-stock portfolio and started taking withdrawals at a rate of 4% per year? In that case, the funds would have run down nearly to zero within 25 years. And if the withdrawal rate had been even just a little higher—4.5% instead of 4%—the funds would’ve been fully depleted within 20 years.
Does that mean Tom’s 100%-stock strategy would be inadvisable? The answer is nuanced. Here are some key points to consider:
First, it’s important to recognize that a retirement in 2000 was close to a worst-case scenario. Looking at retirement dates over the past 100 years, there were just two other cases in which a portfolio would have deteriorated so quickly over the course of a 25-year retirement. The first, not surprisingly, was 1929. The second was 1969, just before the malaise of the 1970s, when market returns stagnated while inflation accelerated.
Aside from those limited cases, an all-stock portfolio would have been a winning strategy in nearly every other time period. In 91% of rolling 25-year periods between 1926 and 2025, a retiree would’ve ended up with more money after 25 years of withdrawals than on the first day of retirement. In about half of 25-year periods, the amount of money in the bank after 25 years would have been five times more than at the beginning of the period.
Tom’s all-stock strategy, in other words, would have been the right choice in nearly every case over the past 100 years. Still, I wouldn’t recommend it to anyone approaching retirement, for these five reasons.
First, and probably most important, is the fact that we each have only one chance at retirement. If we happen to end up with an unlucky sequence like in 1929, 1969 or 2000, it would be cold comfort to know that we were simply unlucky. As Bill Bernstein likes to point out, the odds of losing at Russian roulette are just one-in-six, but it goes without saying that still none of us would take that risk. Similarly, we can’t know what the future holds, so that’s why I’d recommend an asset allocation that, statistically speaking, might be more conservative than necessary.
Another reality is that history is an imperfect guide to the future. In the past, there have been just three very tough periods for new retirees, but there’s no guarantee what path the market will follow in the future. Look no further than Japan, which only recently emerged from a 34-year bear market.
Another risk is inflation, which was a key reason why the late-1960s were such a difficult time to retire. The government’s difficulty in reining in inflation since the pandemic is a reminder of this risk.
Another consideration: I assumed in my simulation that a retiree’s portfolio withdrawals would follow the popular 4% rule, starting at 4% in the first year of retirement, then increasing in lockstep with inflation. Those assumptions are useful for financial modeling but don’t reflect the way real people spend money, which varies much more from year to year. If I had assumed spending that was even modestly higher than 4%, the failure rate would have been much higher.
The last reason I’d be wary of an all-stock portfolio isn’t mathematical at all. It’s the reality that stock market declines can be enormously upsetting. So even if you can theoretically afford to take more risk, that doesn’t mean you’ll be happy when the market inevitably declines at some point—or at multiple points—during retirement.
A final note: So far, this discussion has been limited to retirees. If you’re early in your working years or building a portfolio for a young person, then sequence-of-returns risk should be much less of a concern, and a portfolio like Tom’s might make sense. In fact, if you’re more than 10 or so years away from needing to draw on your funds and have some dollars set aside for whatever might come up in the meantime, then in that case, I would absolutely consider an all-stock portfolio.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Excellent as always Adam, you ran numbers I had thought of but couldn’t do the requisite math. But as a follow up, I’m very curious as to the answer to the question, “if not stocks, then what else?” given that in recent downturns bonds had not offered the downside protection that some/many may had presumed. Might a larger cash/cash equivalent be a better choice?
I am working and still a good number of years to go before thinking about when to retire. Thus, 100% equity for the last many years already and will keep doing so for at least another 10 years or so.
I have been 95% stock and 5% money market for 49 years. I will never change ratio.
I suspect the size of a portfolio is important. If it is substantial enough that you can still live comfortably after a 50% downturn, then 100% in equities would not be a problem.
Excellent article. When younger and working we had 100% equity portfolio. Upon retirement reduced it and it is now 73% equities. The rest is for the worst case scenarios you outlined, designed to carry us through a prolonged downturn. My IRA is where the liquid assets are (MM and ultra-short term bond ETF), and the RMD alone covers all our expenses. Then we have 2 SS and dividends that kick in.
When I started the work/invest journey 40+yrs ago, I saw the long term bond & equity returns was something like 5% & 11%.
Since I was in it for the long term, I was always 100% equities. I am recently retired. But my outlook is for another 35yrs. So I am still Long Term goal oriented.
My conclusion from seeing the above 5% & 11% returns was: “Bonds are for Suckers”.
(But wait!! “Bonds are less risky”. I call BS. If a company goes Chapter 11, the bondholders either lose most or all of their investment the vast majority of the time– So a big fat red herring)
A side note on this assertion, which I think is part of Tom’s argument:
“Suppose, for example, a retiree is taking withdrawals at a 4% annual rate. Even if the market were to drop 50%, that 50% loss would only be applied to the 4% withdrawal, resulting in a loss of just 2%.”
That argument about 2% seems wrong. Even if the portfolio bounces back the next day, the loss is at least 4%, the amount withdrawn. E.g., $1M drops by half to $500k, take $40k withdrawal leaving $460k, which doubles next day to $920k. This is 95.8% of $960k, what you would have had if the market had not dropped for a day, or a 4.2% loss. Not 2%.
The amount withdrawn isn’t a full loss because it didn’t disappear; presumably it was spent on something. But, it only had 50% of the purchasing power it had before or after the drop; the other 50% was the loss.
The article mentions specific years. Another was 2008. I know someone who retired then. Her stocks plummeted, but she also had the double whammy that interest rates were so low that she wasn’t getting any income from CDs or treasuries.
And a point on market timing. We cannot time stocks. But to some extent, we can time bonds. During the period where interest rates were dropping, this was an obvious trend and it made sense to own bond funds for the capital appreciation. (I owned bond funds and took capital appreciation when rates hit 2%; I should have waited longer, but this proves my point.) Similarly, now with rates rising, I don’t see why it makes sense to own bonds funds. It seems to make more sense to own 3, 6, 12 months treasuries and then move back to bond funds when we think rates are topping out.
So what happened to the mixed equities/bond portfolio for 2000 retirement and same withdraw rate (i.e., did it deplete slower)? Also, what % would be bonds and what index represents the equities portion?
Thank-you it’s an interesting article as this issue is in the forefront now after the end of the great bond bull market (i.e., 2020).
I read that bonds have taken a bath recently because interest rates on government obligations have gone up so much. I’m assuming that is because existing bonds at lower rates have become unwanted and therefore the prices of those existing bonds must fall in order to be sold.
My question is this: If interest rates on these government obligations are now so high (from a comparative history standpoint), is this an especially good time to buy them, as well as to buy bonds that are issued at today’s higher rates, because it is an opportunity to lock in those rates, and it is unlikely rates will climb too much higher?
Why? I have only a small exposure to bonds, through a balanced mutual fund, and am way on the 80-90% stock side. But I’m thinking that with all of the recent stock growth concentrated in AI and similar stocks, maybe I need some more conservative investments in bonds and government obligations.
Adam,
You took a hypothetical situation and made it much more extreme by using assumptions that make your case look stronger.
Is 100% bonds better than 100% stocks? Of course not.
I’ve read and researched hundreds of articles and papers on retirement, and I haven’t found one that recommends a 100% stock allocation.
Here are several ideas I find particularly compelling:
Flexibility is always recommended.
Well said Fund Daddy. But I think inflation kills portfolios, and that is why I vote for a high stock ratio of 85%, and the ballast Cash at 15%. We all take some risks and no portfolio can be designed to be perfect, I just believe in Buffett, being high on stock S&P 500 at 90%.
Thanks, Adam, for your always excellent articles.
Is there an argument for a portfolio that is stock heavy, with a substantial allocation to MM funds (at least during this period of decent interest rates), and only a small bond allocation, if any? I’m assuming enough in the MM funds to cover expenditures for 10+ years.
This is very close to our approach. Index stock funds and heavy on gov’t backed MM funds (including tax free municipal funds) and treasuries and CDs with maturities less than 2 years. Some with longer maturities out to 20 years, but mostly shorter term. We’ve very concerned with inflation and want the opportunity to buy back in as rates rise. If we’re wrong about rates rising, then we do better.
Cammer,
I see that you don’t mention any TIPS in your fixed income. If true, what was your thought process on that decision? I currently have no TIPS and haven’t convinced myself to change this.
Always great info. However my question is, why would the best investor of all time say: if he died his wife should invest 90% in stocks and 10% in Treasuries? I have chosen to go with Buffett. There are risks in everything, but I have made my choice and I am sticking with it. NO Bonds for me. I sure would like some comments.
Before I explain my current thinking, I’d like to provide you with context. I’ve been a student of Warren Buffett for decades. Berkshire Hathaway has been my best investment. I attended a Berkshire Hathaway shareholder meeting in 1990 with my father. Guys would sidle up to my father to talk about Berkshire Hathaway and he’d explain that I was the shareholder, not him. They would look at me, a young man, and keep talking with my father (which I found humorous).
Starting in 1985 I was for decades100% in equities. Over the past 24 months my portfolio has transitioned to 60/40 with 60% fixed income and 40% equities. Of the fixed income about half is in Treasuries. I still have my Berkshire Hathaway shares. Sure, I’m retired now, but my portfolio restructuring has nothing to do with retirement and everything to do with risk management. Let me explain.
As the 10 year Treasury gets close to 7%, the need to invest assets in equities dramatically declines, especially at current market levels. The Buffett Indicator https://www.currentmarketvaluation.com/models/buffett-indicator.php is currently at 244% indicating that the stock market is strongly overvalued. As someone who lives in Silicon Valley and did well during the dotcom bust (for reasons more to do with luck than anything else), I am extremely sensitive to the economic cycle and market mania.
My focus right now is on preserving and guaranteeing my portfolio value after decades of stock market over-weighting which has played out remarkably well.
I have a friend of mine whose portfolio is 100% equities and he has to time stock sales to pay for expenses. My fixed income portfolio generates more income than I spend and it arrives on a regular basis.
Right now, if you are willing to roll up your sleeves, you can find fixed income paying 7% at a 15% tax rate. There are safe fixed income investments offering somewhat higher yields from solid companies (with preferreds also offering potential capital gains when called). I stay away from high yield bonds.
My Treasuries currently provide a 3.7% yield, but they serve another, more important purpose: they are what Buffett calls “dry powder” so when the stock market reverts to the mean and people panic sell, yours truly will be waiting patiently to buy shares. I know you should not time the market and I’ve typically been early in my investment decisions, but with the exception of Berkshire Hathaway, “buying and forgetting” doesn’t seem like a winning formula, especially not today.
Hey Tom, thanks for your thoughts. My actual situation is 85% stocks and 15% cash. I use the cash as the ballast when stocks get crazy, then just hold out until they come back. The largest portion of my stock holdings is in the S&P 500. Now at 80, I have no intentions of changing. Pretty much it is what risk works for you. This is OK with me for the next 15 to 20 years, God willing.
2 easy questions
1) What is your portfolio size?
2) Do you have a pension?
If you have a big portfolio…or…your pension+ SS cover all your needs, you can be in 100% stocks or bonds.
Fund Daddy, 1. My portfolio size is in the top 15%. 2. I have no pension. I live in a CCRC and need part of my RMD to cover all costs. My cash can cover 10 years of expenses, probably more as long as SS continues. I like cash, no strings and whatever I need is there when I need it. I have no need to be 100% stocks, since I like taking some risk off the table. I have been blessed and 85% stocks, and 15% cash works for my family.
I have lived through the 1969 lower market. I bought my first mutual fund in 1968 and didn’t break even until 1980. If that had been my retirement, I would have been broke. Though out my investing career I have been mostly in stocks except when interest rating got so high in the late 70s and 80s. Then I was mostly in bonds and CDs. When I retired I bought an annuity and that and social security provide more than enough income for my wife and I as we have no debt. The annuity runs out in about 7 years, so I am building a portfolio of tax free municipals and dividend paying stocks (mostly pipeline partnerships) to pick up the slack at that time. This strategy has allowed me to keep most of the rest of my money in equities and cash. In retirement you have to have some secure income so that you can ride out stock market and bond market volatility. I would add that when interest rates got very low a few years ago most of my bonds got called and I was almost in a 100% stock portfolio. I gravitated toward dividend stocks and then gradually added bonds as rates came back up. I am still mostly in equities at age 80. Excellent article.
For your three examples, can you also give the data if person had different percentage of bonds and what those outcomes would look like. And then using those same percentages, are there other periods of time that those portfolios would have worked worse than the 100% stocks (I assume they are worse the majority of the time?)
Excellent article, thanks Adam. I have a relative that retired in about 2019 after a great career with a major oil company. After many years of overseas work, he took a lump sum retirement in his early 60s. He told me it all went into the stock market. Obviously, I found that surprising. Then Covid hit and the sequence of return monster reared its ugly head. He decided to diversify into commercial real estate. Other friends and family seem to have done well in that. Since then, he’s had a guy drive a vehicle into a storefront, major HVAC issues on one of his buildings, and then a tenant was running a fraudulent medical service out of another of his buildings leaving a huge mess behind and months of missed payments. My point is risk lurks just about everywhere, in many different forms, and so diversifying in retirement makes a great deal of sense. As for my relative, I doubt he overpaid for the buildings because he’s a very smart guy, and he is one to persevere through the bad luck, so I have no doubt it will turn out fine in the long run, but in the meantime….things can get hard.
I would not even consider a 100% equities portfolio. I am retired and I am scared to death that our own government is going to wreck the economy before I die with their annual deficits at such an insane level. The first big buyer of U.S. debt to refuse to purchase any more (China? for example) is going to start a stampede for the doors.
Interesting “theoretical “ question and answer, Adam. Maybe as a follow up question….I retired 3 years ago and have benefited from a very good run of the stock market (a high %age mix but not 100% stocks) for my portfolio. Should I consider changing/ increasing my stock allocation knowing I haven’t picked/ experienced one of those 3 worst times to have retired?
Another question…is the profile of the stock market different today with the dominance of many high-valued technology companies vs. 20 years ago when such behemoths were rarer?
In reading through this thread, it strikes me that there’s a rule of thumb question here that needs to be addressed. Rather than a model 25- or 30-year retirement, I think the numbers to consider first are our expected death date and the date of our retirement. A retirement that begins at age 55 and ends at 95 carries more portfolio longevity risk than hanging it up at age 70 and dying at 85. Of course, we won’t know how far we could have pushed our allocation or our spending rate until too late to make a change, but wouldn’t we want to err on the conservative side? Still, considering each year that passes puts us one year closer to the end of retirement, it makes sense we could let our investment mix creep closer to the riskier side.
Just adding to your scenario, I’ve read a few times that once you’re five years into retirement, you can rest easier about sequence of returns risk.
BEWARE: Many times people have lost significant sums in their retirement accounts believing, “this time it’s different.”
A year ago I posed the following question to Jeff Ptak a researcher at Morningstar: I have read for years that early retirees should beware of sequence of return risk but I have not read when do you know you are essentially out of the woods when it comes to that risk.
https://www.morningstar.com/retirement/how-avoid-outliving-your-retirement-savings-its-all-sequence
After researching the matter he wrote,” unlikely: If you made it through the first five years of retirement with investment gains, there was only about a 1 in 25 chance you’d subsequently deplete your savings before reaching the end of retirement, assuming you stuck with the system of fixed real withdrawals. Even after one year of retirement, a gain cut your risk of failure in half.”
Also of note in the article he wrote that the highest safe withdrawl rate for a 30 retirement was 3.7%, would occur with only an 20%-50% equity allocation. My guess this percentage could now drop a little further with higher bond returns 18 months later,
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