Thinking Beyond Stocks Can Fortify Your Accumulation Plan

Advanced, Featured, Goals, Theory

A fellow Boglehead asked a really good question recently, and I think it’s something we’ve all considered at some point:


Why shouldn’t my asset allocation be 100% stocks during the accumulation phase?


After all, the typical justification for a heavy stock portfolio sounds pretty darn compelling.  They historically have a higher return than bonds in the long run, which means bonds are defensive assets that reduce volatility but do not necessarily increase returns.  On top of that, interest rates are so low today that bonds look particularly unappealing.  So if you can handle the bad years and pile as much money into stocks as possible you’ll be much better off and can feel free to be defensive with a larger pile of money once you retire.

Well you know what?  If you’re the type of investor with a rock-solid stable job, few financial commitments, and the personality to ride out both short-term and prolonged market pain without sweating your account balances, then putting all of your money in stocks is just fine.  The Total Stock Market portfolio is included on the site because I appreciate that it’s a good choice for many people.

But I’m going to go out on a limb and surmise that you’re reading a blog about portfolio theory because you believe that just maybe there’s another side to the story.  You’ve come to the right place, as I’m a strong believer in the power of asset allocation in creating positive and pleasant investing outcomes.  So for those interested in a different perspective, I’d like to try my hand at making the case for broad asset allocation in all phases of life.

Why consider diversifying away from stocks not just tomorrow but today?

Diverse portfolios including bonds and other assets are more dependable, efficient, and sustainable for most investors.



Let’s start with the basics.  Why do we save money at all?

Seriously — stop and think about that for a moment.  Why do you invest?  What are your ultimate goals?

I think too many people don’t really have an answer for that other than the general concept of making as much money as possible.  Now there’s nothing at all wrong with maximizing your account balances with intelligent decisions, but to fetishize wealth with no greater purpose than undefined incremental luxuries is to me a sign of someone who has lost a bit of perspective of what matters in life.  I’d like to hope we all have greater goals that ultimately have little to do with the number of zeroes on a bank account, whether it’s a nice home we always dreamed of, a college education for our children, or a happy retirement with time spent with family.

So when people talk about investment “risk”, let’s be really clear what that means.  It does not mean mathematical volatility as it is too commonly defined.  It means the risk that your money will not be there to support your important life goals at the time you need it.  Your risky stock investments may make a lot of money if you wait long enough, but there’s absolutely no guarantee they will cooperate on your schedule for home ownership, college, or retirement.  And if supporting your dreams is the ultimate purpose for investing, I’d argue that dependability is an extremely important measure.

To truly understand uncertainty and dependability, however, you really have to look beyond the averages.  For example, let’s compare the entire collection of all accumulation paths (since 1972) for three different portfolios: the Total US Stock Market, Coward’s Portfolio, and Golden Butterfly.  These show the inflation-adjusted portfolio values for 44 different investors starting with nothing and saving $10k a year using actual historical data.  The only difference is the year each investor started.


The thing that’s immediately evident here is the difference in the spread of outcomes.  There’s no such thing as absolute certainty in investing, but not all portfolios are equally uncertain!  Another characteristic to consider is the peaks and valleys along the way.  That’s largely where dependability comes in, as the very real possibility of your accounts shrinking by a third the year the kids start college is no trivial matter.  Not every life goal can wait for the markets to cooperate.

But surely that extra risk is rewarded  — right?  Not always.  Here’s what they all look like on the same chart.  Red is the total US stock market, blue is the Coward’s Portfolio, and gold is the Golden Butterfly.


Now one can absolutely argue that stocks have more upside based on the data, and those primarily concerned about maximizing money in the long run have good reason to be attracted to the all-stock portfolio.  But the Coward’s Portfolio provided a similar range of outcomes with a fraction of the volatility, avoiding any of the temporary euphoric highs and subsequent drops of the 90’s stock bubble that played havoc with realistic portfolio expectations and goal planning.  And the Golden Butterfly was about as steady and predictable as you’ll find in a portfolio, competing strongly with stocks over many timeframes before eventually succumbing to stock growth over the longest periods.  Pair that with a slightly higher savings rate to boost the endpoints where you need them to be, and you were all but guaranteed to achieve your goals on-schedule and stress-free.

Different people have different goals, and there are many ways to get there.  But I’d argue that they are much easier to confidently plan for and achieve when the underlying portfolio is dependable.



For many people, the idea that something like the Coward’s Portfolio can support a very similar range of accumulation outcomes as the total stock market but with a fraction of the volatility sounds quite unintuitive.  Actually, that’s probably being kind.  Ask most people whether a portfolio with 40% short term treasuries (basically cash) can match the returns of a 100% stock portfolio, and you’ll probably be called a few names.

But the facts speak for themselves, and I think the reluctance to believe this is caused by an incomplete understanding of exactly how the math behind a regularly rebalanced portfolio of uncorrelated assets works.  I personally think the idea that stocks are “offensive” and bonds or other assets are “defensive” is a mantra that prejudices investors to evaluate assets individually while ignoring how they work as a group.

When evaluating a portfolio, one must look at the big picture. Like how a basketball team of perfectly fitting role players can often beat an ill-fitting All-Star team, the performance of a diversified portfolio can be far better than the underlying assets.  Investing isn’t about piling in as much horsepower as possible into a portfolio and hoping it doesn’t burn out.

So how do diversified portfolios do so well?  They’re more efficient.

In investing, the concept of efficiency is most commonly discussed in terms of risk-adjusted returns.  Basically, it’s all about tradeoffs.  What are you willing to risk for your potential higher gain?  Sure you can invest in a portfolio with a higher average return, but with the tradeoff that your odds of actually achieving that return with any certainty are much lower.  Portfolios that work towards good returns while minimizing downside risk tend to do quite well compared to pedal-to-the-metal portfolios.

Now that sounds great, but how is one to identify these magical portfolio unicorns with superior risk-adjusted returns to the stock market?  Surely they are quite rare, so why waste our time chasing the unattainable?

Here’s the thing — they’re not rare at all.


This chart shows every possible combination of up to five of the 26 assets on this site. That’s over 83,000 portfolios.  They are charted based on two measures — the single worst year since 1972 (my practical measure of “risk”) and the minimum real compound annual growth rate over any rolling 15-year period since 1972 (the worst-case return over a reasonably long timeframe that helps see through start date bias and deceptive averages that taint most portfolio comparisons).   For lots more info, read this.

Look at the red square.  That’s the Total US Stock Market.  There are literally thousands of portfolios that have historically generated consistently superior long-term returns with smaller drawdowns!  In fact, the data suggests that just putting all of your money in stocks is actually one of the most inefficient choices in terms of risk and return compared to the vast majority of other options.  Each of the other colored points represents a lazy portfolio from the site, and you can also surf every gray point using the Portfolio Finder.

Now some of you may be thinking by now that just because a portfolio has 100% stocks does not mean that it must be 100% Total US Stock Market.  There are many different factor funds and international funds one can also buy, and diverse stock portfolios will also have different risk-adjusted returns.  That’s absolutely true!  So let’s look at the effect of stock diversification.All-Possible-Portfolios-vs-Stocks

The light purple cloud represents all possible portfolios consisting only of stocks, regardless of the stock index.  They cover all factor funds and international options.  Interestingly, diversifying stock funds does generally follow the old mantra of increasing both risk and return over simply buying the market as a whole.  In contrast, by mixing in other types of non-stock assets you can often achieve similar returns but with a fraction of the downside risk.  In order to move into the superior risk-adjusted gray points to the right, however, you have to diversify out of stocks.  Bonds and real assets like gold and REITs are critical components to any efficient portfolio.



If we’re honest with ourselves, the idea that putting all of your money in stocks isn’t necessarily the most efficient investing option really shouldn’t come as a surprise.  After all, the typical advice to invest in a high percentage of stocks when you’re young and a smaller percentage as you near retirement is born of the reality that stocks are risky.  However, if stocks are too risky to hold after retirement, it’s not like the inherent risk of the stocks changed.  The only difference is our willingness and capacity to accept that risk.

Interestingly, risk aversion tends to be fickle.  Note that in our original argument for stocks, the same investor who believes he has all the time in the world to wait out a stock market correction (while optimistically believing that the correction will not happen right as he plans to switch portfolios) may be completely averse to bonds at current interest rates.  The fear is not without merit,  and the time sensitivity of a portfolio choice is an important factor to consider.  But again, it’s critical to look not simply at the individual assets but also at the big picture.


These are Heat Maps of the same three portfolios we discussed earlier that show every historical real return of each portfolio arranged by the year you bought in and how long you were invested.  Note that all three had virtually identical long-term CAGRs but very different paths to get there.  The red squares and various performance metrics allow you to gauge the relative pain magnitude that investors in all three portfolios experienced over time.

The stock market did do quite well in the long run, but it was certainly not immune to prolonged periods of highly painful losses.  Are you truly prepared to wait 13 years before turning a profit on your investments?  If not, you’re guaranteed to sell low and take a loss.  For many people, investing wholly in the stock market is rationally appealing based on all sorts of great historical returns data but is practically unsustainable.

Now let’s take the Golden Butterfly.  Its assets are definitely not immune to prolonged losses, either.  It holds 20% long term treasuries that were crushed when interest rates skyrocketed in the 70’s.  And someone buying gold in 1980 would still not be above water on that purchase even today!  So having large percentages of those assets must have killed returns over those timeframes, right?  Not at all.  By having multiple types of very different assets, the portfolio contained firewalls that prevented any one asset correction from overwhelming the portfolio.  And when prices fell, the portfolio bought more through rebalancing.

The ultimate measure of portfolio sustainability is not how it avoided underperforming assets, but how it survived or even benefited from them.  In the end, combining a variety of individual assets resulted in a portfolio far more appealing than any asset on its own.

When considering the historical performance of a portfolio, it’s important to not just look at the average returns but also at the path it took to get there.  If the journey is not sustainable, then all the rosy numbers in the world are just an illusion.  Don’t let the recent bull market in stocks lure you into a false sense of complacency — the best time to diversify is not after you need the additional safety, but before.  Personal sustainability through the tough times is what will separate your portfolio from all of the others, regardless of returns compared in a vacuum.


Putting It All Together

So is there anything inherently wrong with investing one way in accumulation and another in retirement, or with building a glide path along the way?  Not at all.  There are many good portfolios for all types of people, and thoughtfully transitioning between them as life circumstances change is perfectly reasonable and a sign of an attentive investor.

I’m not arguing against changing portfolios as much as I’m arguing for truly understanding all of the options and tradeoffs ahead of time.  The correlation between risk and return is not as cut and dried as you may have been led to believe, and I’d argue there’s a better way to invest in accumulation than just putting all of your money in the stock market.  Many ways, in fact.  If you take the time to find a dependable, efficient, and sustainable portfolio that works for you, I’ll wager you won’t feel such a need to change once your accumulation phase draws to a close.

If you’re interested in exploring diverse asset allocations and aren’t sure where to start, there are a lot of great resources here on the site.  If you’d like to explore the specific examples from this post, try the Portfolio Growth, Heat Map, and Portfolio Finder calculators.  They’re all fully customizable to explore any asset allocation you wish.  For examples of a bunch of portfolio ideas, try the Portfolios section.  Compare them all, and you’ll start to get a feel for the opportunity space.  And while I’ve intentionally avoided retirement discussions in this topic, withdrawal rate math does influence accumulation as well.  Check out the Financial Independence calculator for an in-depth exploration of how asset allocation affects both sides of a retirement goal.

And if after reading all of this you feel like 100% stocks is still the right choice for you, that’s great!  My goal is to educate people on different ways to look at investing, not to convert anyone to some monolithic viewpoint.  I hope you appreciate the reasoning enough to bookmark it and come back to the topic once wider diversification makes more sense for your personal circumstances.

But most importantly, if I were to leave you with one piece of advice about selecting the best portfolio for accumulation, it would be this:


The guaranteed best way to build wealth is with your career and your savings habits, not with your investments


A portfolio is only as good as the money you earn to invest, and it’s important not to hold the markets on a pedestal.  Make sure you have a healthy balance in your financial optimizations, as other factors are arguably far more powerful and are unquestionably more in your control.  And never take unnecessary risks with money you can’t afford to lose.

Stocks may (or may not) get you there more quickly, but asset allocation will get you there more dependably, efficiently, and sustainably. Pair a balanced and confident asset allocation with a solid work ethic and a healthy savings rate, and you’ll be on the fast track to success.  Accumulation isn’t a race.  It’s a plan.  Your important life goals deserve better than to be left to chance — build your plan today.