Your Single Most Important Financial Decision

Contrary to what most people think, everybody has the same investment horizon for their true long-term money. Long-term money is the capital you have dedicated for your goals years into the future, not money expected to be spent over the coming one, two or even three years. What is that magic time horizon? Regardless of your age that period is the rest of your life. Every day you have the chance to allocate, or reallocate, your money over various investment asset classes. Defaulting to the cash option, as happens automatically with most employer-provided retirement plans, is a horrible choice that occurs with amazing frequency. Classic financial planners almost always suggest spreading your money over stocks, bond and cash (or cash equivalents like T-Bills or money market funds). They tell us that the mix should skew toward holding more fixed income and less equities as we get older. Platitudes like the correct percentage of stocks to hold is 100 minus your age are well known and generally accepted as conventional wisdom. Target date mutual funds and ETFs have become popular in recent years as an automatic way to lower stock exposure and increase fixed income as you approach retirement age. That advice, though, doesn't hold up to scrutiny when actual long-term investment results are taken into account. No wonder average investors are left scratching their heads over the advice they are receiving. The most-recent 15-year period included the worst stock market crash (Oct. 2007 - Mar. 2009) of most of our lifetimes. Even so, large-cap equities, as measured by the S&P 500 ETF still averaged 8.87% for the period ended Apr. 30, 2019. That was far better than T-Bonds, T-Bills or cash equivalents provided, even with the extraordinary boost they received from the Fed's Zero Interest Rate Policies (ZIRP). Look out even further and the advantage of owning stocks becomes even more apparent. The 10, 50 and 91-year cumulative returns tell the same story. There has never been a truly long-term period when equities didn't provide far superior results. Geometric Averages appear more realistic than arithmetic averages as they take into account the effects of compounding. How much more would you have if you ignored asset allocation and simply owned 100% stocks over your lifetime? A lot. The numbers, from 1928 through Dec. 31, 2018, show each $100 strictly in stocks grew to a massive $382,850. That was $380,787 more than conservative T-bill investing would have provided and $375,541 more than long-term Treasury bonds would have grown to. Today's investors face even worse odds if buying fixed income. Coupon rates have rarely been lower. In the end, bond and CD returns are capped at their original coupon rates if held to maturity. Newly issued fixed income, then, has zero chance of good returns unless you think long-term deflation is in the cards. The chance of that, with a Fed goal of creating inflation, is virtually nil. The single most important decision you can ever make is to commit to a portfolio 100% invested in equities. You can't spend risk adjusted returns. You can only spend money. The best way to have a happy and prosperous retirement is to accumulate as much as you can over your working lifetime. That only works by owning growth assets along the way and holding firm to that allocation through good times and bad. Disclosure: My own retirement accounts have been 100% equity based since inception. I do not practice market timing. The process worked. My IRA account is well into seven figures. It produces enough dividend and covered call writing income to live on comfortably without disturbing principal.

Your Single Most Important Financial Decision

Your retirement account would be much further ahead if you ignored asset allocation guidelines and simply owned 100% stocks over your lifetime.

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