That’s right, my accounts are 100% invested in stocks. Let me tell you why.
It all has to do with wealth and earning potential.
There Are Two Kinds of Wealth
This is your ability to earn an income. Remember: You are your biggest bond, so take care of yourself. When you are young, you have your whole life ahead of you. This is what makes your human capital your largest and most valuable asset. This human capital allows you to take risks, like moving across the country or investing 100% in stocks.
As you get older, you have less human capital. Some people have health issues later in life that prevent them from working. Family situations or other things can come up that prevent you from staying in the workforce.
When you are young, your financial portfolio is a very small part of your total wealth. You have a lot of time to invest in the market and let it grow. It’s okay to take risks because even if you lose it all, you should have plenty of time to earn it back.
When you get older, it can be harder to earn money. That’s the time to become more conservative. I will likely stick with 100% stocks until I decide I’m ready to quit corporate America, at which point I will likely start shifting money into bonds over that last couple years.
Throughout your career, you are trading your human capital for financial capital.
Playing Market Averages
The S&P 500 has had an average annual return of about 10% since its inception back in 1928. Long-term bonds (the most risky) have had an average return of between 5 and 6%.
Higher risk, higher reward. I’m investing for the long haul, and I can earn it all back if I lose it.
Own a Home? Another “Bond” You Probably Didn’t Think About
Homes are obviously considered real estate, and real estate can be risky. However, if you own a home, you likely have equity in it. Make sure you include that equity in your overall picture. I think of it like a “bond.” The value of a house is usually much steadier than the value of stocks. It’s still risky, but remember: when you are young, your human capital is your most valuable asset.
When Planning for Yourself…
Just because it works for me, that doesn’t necessarily mean it will work for you. Everyone has their own risk tolerance. Before making any changes to your own portfolio, consult your CPA or Financial Advisor. They should have valuable advice for your personal situation.