When a Little Means a Lot!

In my book I encourage young people to start investing early. I think that I clearly demonstrate that investing in your teens can lead to financial independence at an early age.


What may not be so clear is why I recommend an all equity portfolio as opposed to the oft recommended balanced portfolio. History shows us that a portfolio composed of United States company stocks has produced a compound rate of return in excess of 10%.If you introduce bonds into the portfolio mix, you lower the volatility (the up and down swings), but you also lower the expected return.

This matters greatly in the potential results. If you make the mix 80% stocks and 20% you may lower the overall return from 10% to 9%. However in the case of a long time horizon the results are far more than 10%:

If you save and invest $5000 per year at 9% the result is $1,689,412. If however your compound return is 10% the projected amount is $2,212,962. At 9% you earned an average of only 10% less, however, because of compounding the interest the result was 23.7% less. Often conventional wisdom will lead investors to what the industry calls a “balanced portfolio” of 60% stocks and 40% bonds. This is likely to produce a return of about 7%. Now your ending balance after 40 years is $998,175. Over 50% less than an all equity portfolio.

An all equity portfolio will have higher ups and lower downs than a blended portfolio. During the financial crisis of 2008-2009 all equity portfolios were off 40% or more. These drops will test you but history shows us that those who stick to their strategy are rewarded.

While my book is targeted to young investors who have the advantage of a long time horizon, I do not recommend an all equity portfolio once you have enough for financial independence, or if you have ended the accumulation phase and are relying on your investments for income.

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