Why A Long-Term Investor Should Invest All His Money In Stocks

A long-term investor is someone who wants to be invested with a time horizon of 20-30 years. Such an investor would be prudent to invest all his money in stocks. He should be clear in his mind that he will not sell his stocks even if they go down considerably in value.

Why do I say that?

Look at the data below:

1. Asset allocation and Returns( 5 year horizon)

Asset allocation and Time horizon -5 years

2. Asset allocation and Returns( 20 year horizon)

Asset allocation and Time Horizon - 10 years

3. Asset allocation and Returns( 30 year horizon)

Asset allocation and Time Horizon -30 years4. Long term asset allocation with various time horizons

Asset allocation and time horizon-variousWhen you invest for longer periods of time it is clear that equities have a higher average annual return than bonds. By bonds, we mean 10 year US government bonds. By equities we mean the S&P 500.

The variability in this return is quite high at shorter time horizons, but when you look at 20 year and 30 year time horizons, the variability is actually very low. In fact, at a 20 year time horizon, the variability of stock return(3.4%) is almost the same as the variability of bond return(3.2%). At a 30 year time horizon, surprisingly, the variability of stock return(1.4%) is half of that of bond return(2.8%). 

And more importantly, over a period of 20 to 30 years the average long term return of stocks is around 11.2% while the average annual return of bonds is around 5.5%. This means if you invest $100 in stocks or $100 in bonds the amount of wealth created at the end of 20 or 30 years is as follows:

Value of stocks versus bonds after 20 or 30 yearsSo, the answer is clear. It is prudent to invest all your money in stocks if you are truly a long term investor. The reason we do not do it is because we say we have a long term horizon while really we want to make a quick buck.


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