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100% Stocks vs. 90/10 Portfolio

By JLP | April 13, 2007

I have always been in agreement with myself that 100% stocks is the way to go when investing for the long haul, I mean afterall, over the long run stocks perform the best. Historically that’s true and in my mind the case was closed. That was until yesterday when I put together Deciding the Trade-Off Between Volatility and Return

After running the numbers comparing a 100% S&P 500 stock portfolio and a portfolio consisting of 90% S&P 500 stocks and 10% long-term government bonds, I will concede that the 90/10 portfolio has some merit. Take a look at the graphic that shows the annualized rates of return of each portfolio over different time periods to see what I mean:

Notice that over the last 5 and 10-year periods, the 90/10 portfolio actually outperformed the 100% stock portfolio. This should come as no surprise given what occured over the last 5 and 10 years. In fact, what I found interesting when doing the research was that since 1926, the 90/10 portfolio outperformed the 100% stock portfolio 31 times. Of those 31 times, 22 of them were during down years. Another interesting fact: during the down years, the 100% stock portfolio NEVER performed better than the 90/10 portfolio.

So the 10% bond exposure did its job of minimizing the downside during the down years. When you think about it, one could actually consider the “underperformance” of the 90/10 portfolio throughout all the years as a sort of “portfolio insurance expense.”

Topics: Investing, Miscellaneous | 19 Comments »

19 Responses to “100% Stocks vs. 90/10 Portfolio”

  1. Him Says:
    April 13th, 2007 at 10:40 am

    Great analysis. Her says we should be in 100% stocks, while I prefer the 90/10 mix. How about a 95/5 portfolio for a compromise?

  2. JLP Says:
    April 13th, 2007 at 10:44 am


    I think I would stick with 100% stocks and just accept the volatility.

  3. tinyhands Says:
    April 13th, 2007 at 11:30 am

    As the numbers indicate it ENTIRELY depends on your investment timeframe. Younger investors will be paid off for the volatility they must endure, but they must invest for the long term and remain invested. As one nears retirement, it’s important to back off and reduce ones risk. This has been the conventional wisdom for many years and while one must occasionally question convention, this is not one of those cases.

  4. sam Says:
    April 13th, 2007 at 1:41 pm

    Thanks for the analysis.

  5. JLP Says:
    April 13th, 2007 at 1:51 pm


    No problem. Believe it or not, I love messing around with this kind of stuff.

  6. jake Says:
    April 13th, 2007 at 4:11 pm

    Would be curious to see the difference between government bonds and VIX futures. I’ve read before that 90/10 configuration of an S&P 500 Index Fund and VIX futures SUBSTANTIALLY reduces volatility without giving up much return. -jake

  7. The Digerati Life Says:
    April 13th, 2007 at 4:25 pm

    I have never been 100% in stocks even in my younger years. I also need that extra cash cushion just in case I had to use it for some emergency or other reason. It allowed me to sleep at night.

  8. lorax Says:
    April 13th, 2007 at 6:16 pm

    As one nears retirement, it’s important to back off and reduce ones risk.

    This is very important!

  9. Zachary Says:
    April 13th, 2007 at 6:28 pm

    My portfolio is 100% in equity ETFs.

  10. Andy Says:
    April 14th, 2007 at 1:23 am

    I don’t think it makes sense to be 100% in stocks. It is conceivable that something very bad could happen and you would lose maybe 90-100% of your stock holdings. At least if you have 10-20% bonds you will have some money left.

  11. MossySF Says:
    April 14th, 2007 at 5:17 pm

    I’m a believer in 100% stocks — except when things start to look really really scary like the situation now where we have a housing runup the likes never seen before. Housing driven employment twice as high as historic. People in debt up to their ears using their houses as cash machines to buy consumer goods. Absolutely psychotic loans to buy houses with zero margin for error.

    So it’s during times like this when I can see a pileup down the highway, I pull back my speed and move 15% into bonds.

  12. William Wallets Says:
    April 14th, 2007 at 5:57 pm

    Personally, I am a fan of using leveraged stock funds.

    If you invest in a leveraged mutual fund or ETF that gives 200% the return (or loss) of the S&P500 or broader market index with 50% of your dollars and then invest 50% of your dollars in a safer investment such as treasury bonds/notes, then you can get the benefit of diversification of bonds and stocks without actually having to be in 100% stocks.

    I think people are too scared of leverage and don’t realize that using leverage on lower risk asset classes can raise the risk (and hence the return) on those asset classes. The benefit of this is that since not all asset classes are highly correlated, you get a benefit from diversification without losing expected return.

  13. pf101 Says:
    April 15th, 2007 at 9:56 pm

    Great analysis. I’m with you on the 100% stocks thing. I have time on my side and don’t see taking a significant position in bonds for another 10 years or so. That may change as my personal circumstances change, but I’m willing to take the volatility at this point.

    Thanks for another great post!

  14. eR0CK Says:
    April 16th, 2007 at 8:24 am

    Ha! We’re having the same discussion on the diehards forum.

    I’m 100% stock. I prescribe to the notion that one should invest in stocks by using the equation 120-AGE=% in Stocks.

    Considering I’m 23, the equation says I should be 97/3, but I don’t plan on adding bonds until I’m 30.

  15. tinyhands Says:
    April 16th, 2007 at 12:44 pm

    Andy & Mossy-
    I understand what you’re saying, but realize that you’re trying to be market-timers. If your investment horizon is 20 or more years, you’re more likely to do better in stocks EVEN IF the market crashes.

  16. Should Young Investors Be 100% In Stocks? | Amateur Asset Allocator Says:
    December 3rd, 2008 at 11:11 am

    […] was going to run the numbers myself, but as it turns out JLP of All Financial Matters has already done that.  His results are interesting.  Over the period 1926 – 2006, a 100% stock portfolio would have […]

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    June 23rd, 2009 at 11:25 pm

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    Which is the best investment I have made in a very long time,
    I strongly suggest looking into TATA (TTM) and investingThey are moving upward and have the banks behind them in India.

    Good luck .TTM!!!!


  18. Andy Says:
    December 16th, 2010 at 12:41 am

    This is a very interesting post! I didn’t even know this was a common question. I do roughly 90/10 myself, but not for any of the reasons here. I do it because I like to rebalance into stocks when they are low, and out of stocks when they are high. By doing so, I have been beating the S&P 500 by a fairly wide margin. You can only do this of course if you have some stable holdings, so my 10% (which varies quite a bit obviously) is in the stable value fund.

  19. Andy Says:
    December 17th, 2010 at 9:05 am

    I just thought of something. The only way one can maintain a 90/10 balance with market ups and downs is to rebalance periodically. In doing so, you are automatically buying low and selling high, its impossible not to. So, of course 90/10 would beat 100% stocks.

    This is essentially what I do, but I sort of “over-rebalance”. I don’t just maintain a solid 90/10… I go a little softer on stocks when they are high and heavy on stocks when they’re low.