Portfolio allocation is a matter of choice and risk-taking ability of an individual. In general, equities are considered to be a relatively risky asset class.
However, I believe that a certain percentage of fund allocation to equities is important.
A survey by the Federal Reserve in 2017 indicated that 54% of household’s investment in stocks.
I strongly believe that every household should invest in equities.
Let’s look at the reason.
The chart below gives the annual average return for equities and other asset classes for different periods.
The chart (data from World Gold Council), gives the returns from different asset classes.
Be it in the last 10-year, 20-years or since 1971, U.S. stocks have delivered robust annual returns.
Similarly, emerging market stocks (EM stocks) have also delivered healthy returns.
A key conclusion is that if an investor is holding equities over the long-term, returns will be attractive.
There can be investors who are not expert stock pickers. However, that’s not a challenge. The best idea is to invest in the index.
John Bogle, who is the founder and retired chairman and CEO of The Vanguard Group, makes the following observation –
35% of managers beat the market in any single year. But the percentage falls to 25% over a 10-year period, 10% over 25 years and 5% over 50 years – an investor’s lifetime investing horizon.
Therefore, if you can’t beat the index, invest in the index.
And as the above observation shows, even stock market experts find it difficult to beat the index over the long-term.
Another reason for focusing on equities is inflation. As global money printing continues, it’s likely that inflation will accelerate in the coming years.
Investors need to beat inflation to retain purchasing power of money.
I believe that asset classes that will beat the rate of inflation include equities, gold, silver and cryptocurrencies.
Therefore, be it wealth creation or to beat inflation, it’s important to remain invested in equities.
A good idea to invest in the index is through the Vanguard S&P 500 ETF (VOO). The exchange traded fund moves in-sync with the movement in the S&P 500 index.
A sum of $10,000 invested in the ETF in 2010 would have been worth $33,866 as of September 2020.
Note of Caution – The equities markets still trade near all-time highs. If an investor is planning to invest in the markets, it makes sense to invest in parts. Let’s say $10,000 can be invested over a period of 10 months. This will help in averaging if the markets correct from highs.