Should You Be 100% Invested in Stocks?

Portfolio diversification

Investors should have 100% of their money invested in stocks! That’s what Laurence Fink, the chief executive officer at BlackRock declared in 2012.

Since then, the S&P 500 (NYSEARCA:IVV) has broken above record levels and is now 43% higher compared to a -1.4% loss for the total U.S. bond market (NYSEARCA:BND).

While Fink’s advice looks smart (so far) over a highly compacted time frame of just two-years, there have been many periods throughout history when being 100% invested in stocks hasn’t looked so brilliant.

AUDIO: Good News! Stocks have reached a permanently high plateau

For example, during the 5-year period from 2004 to 2009, the total U.S. bond market rose 4.96% while the S&P 500 sank to a 20% loss.

Fink’s super aggressive advice to always be fully invested is a generally accepted practice on Wall Street. One of the reasons is because BlackRock (the firm that employs Fink) – like other money management firms – gets paid based upon the assets it invests on behalf of its clients. Naturally, it’s a money manager’s innate bias that its clients or investors should be fully invested at all times because that equates to more fee revenue. However, that’s not what’s necessarily in the best interests of the investor.

In my latest video titled “Is Cash Really Trash” I discuss two principal reasons why cash (Nasdaq:FRTXX) still plays a valuable role within a person’s investment portfolio. Even though the 7-day yields on “top” money market funds (Nasdaq:VMMXX) are depressed (see table below), cash equivalents – no matter how insignificant their yield – still play a vital role.

Money Market Rates 6.13.14

Besides allowing investors greater financial flexibility, cash (Nasdaq:PRRXX) in a portfolio helps you to meet liquidity demands that arise, without incurring a tax consequence or being forced to sell portfolio holdings at an inopportune time.

For instance, an investor with a 100% fully invested stock portfolio will not always be in a situation when they can sell their stocks for a gain. That means if stocks are in a period of negative performance and the investor needs to increase his or her cash liquidity, they may be forced to sell their stock holdings at the worst possible time – when stocks are down. In contrast, an investor who purposely chooses to not be 100% fully invested is in a better situation when stock returns get bumpy.

Here’s another good reason to keep some cash in your portfolio: it’s a regular habit of the world’s greatest investors. One example is Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A), which at the end of Q1 2014 had a war chest of almost $50 billion in cash. Buffett will use Berkshire’s large cash balance to buy stocks (NYSEARCA:DIA) and other assets that go on sale. The fully invested investor is not afforded that luxury.

None of this is a debate about which is the better asset class. It’s simply about prudent investing.

My latest video examines two key reasons why cash isn’t trash and why despite being the Rodney Dangerfield of asset classes, cash still merits respect.

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  1. john Williamson says:

    I am always learning from your articles on portfolio construction and management. They are a nice compliment to Chad’s good work on short term market forces.

    I retired last year. So cash plays a key role since I am not yet 59 and a half. In my IRA accounts I am close to Mr. Fink’s advice of 100% stocks/ETF’s. I do not feel a need for bonds there yet since I write calls against the equity positions and roll the premiums into new purchases and new call writes given I will not be accessing those accounts for several years. Although every pullback – and we will likely get one this summer due to Iraq and usual midterm election year seasonality – I wish I had a position in Treasuries :)!

    So time frame buckets work for me. My less than 3 year bucket is almost all cash. Once past 59 and a half I can withdraw some of the call premiums and dividends each month rather than sell positions for income negating the need for as high a cash level.

    As always, there are many ways to solve the ‘ol puzzle and I enjoy your insights. – Jay

  2. Ron the Editor says:

    Hi J,

    A higher allocation to stocks is OK, so long as stocks are doing well. In this particular cycle, (really since 2009) portfolios under-exposed to stocks have been penalized.

    The one big caveat for a 100% stock portfolio is when the cycle of hot stock performance begins to wane. Typically, all of the wonderful plans we have (and had) seem unachievable. Basically, that’s what unexpected corrections do to us.

    The assumption that any stock market correction would be short-lived is flawed thinking too. From 1966-1982 stocks were dead money. Who could’ve expected or foreseen such a long time period of underperformance?

    The covered call strategy partially hedges you against the negative impact of a market decline and can help boost cash flow when the going gets tough. Also, when volatility eventually picks up, premiums from calls will rise thereby creating more income. It’ll be a kind of blessing in disguise. Thanks for the kind words and hope you’re doing well in LA!

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