Should your retirement portfolio contain 100% shares?
- Noel Watson
- Jun 23
- 7 min read
Updated: Jun 24
Introduction
In his 1994 paper, retirement researcher Bill Bengen determined that a portfolio containing between 50% and 75% equities (shares) was optimal for providing a sustainable income over a 30-year period. In more recent times, some have advocated that a 100% equity retirement portfolio is a superior option, which we assume is partly due to recency bias (global equity markets haven't had sustained market volatility for around 15 years). There is also the belief that equities tend to outperform bonds over the long term (this is up for debate, but that's a conversation for another day!). This outperformance makes for a more sustainable retirement income, at least, that's the theory.
In this article, we attempt to determine what is best for a retiree, or maybe (as with many topics in retirement planning), it's not always black and white.
Recreating Bill's work
Let's start by attempting to recreate Bill's work. Bill used US large-cap equities and intermediate-term bonds for his work. The closest we can come to regarding asset allocation is as shown below, which we believe is a reasonable starting point.
We will have a starting portfolio of £1,000,000 and withdraw an inflation-adjusted 4% yearly over a 30-year retirement period. Our analysis will begin in 1926, aligning with Bengen's original research.
For this 50% US equity/50% US bond portfolio, the safe withdrawal rate (SWR) is 3.4%. SWR means the minimum amount you could have withdrawn from a portfolio over a 30-year retirement without running out of money. It's effectively the worst-case scenario, and for this example, would've happened if the retiree had finished work in the late 1960s, as indicated by the red line in the chart below.
Up the equity content of the portfolio to 75%, and the SWR reduces very slightly to 3.38%. Finally, if we increase to 100% equities, the SWR falls to 3.26%.
Bill was right, or was he?
A more diversified approach
Bill's analysis focused only on the US market. What if we introduce a more global approach? Let's start with a 60% developed market (global in the screenshot below refers only to developed markets, not emerging ones) and a 40% global bond portfolio. This approach is similar to the "No Brainer" portfolio, with the only difference being that the portfolio below excludes emerging market equities.
For this portfolio, the SWR is 4.01%. Increasing the equity content to 80% reduces the SWR to 3.93%, while shifting to 100% brings the SWR down further to 3.79%.
An (even) more diversified approach
Let's further diversify our portfolio and see if Bill is still correct. The portfolio contains 60% equities and 40% bonds with the following holdings:
36% developed market equity
12% developed market small-cap value
12% emerging market equity
40% global bonds
Our SWR for this portfolio is 4.2%. Increasing the equity content to 80% reduces the SWR to 4.17%, while the 100% portfolio again reduces the SWR to 4.07%. For those wondering, a 50% equity portfolio has a SWR of 4.2%.
A longer retirement
What if we increase our retirement horizon from 30 to 40 years? Our SWR reduces from 4.2% in the even more diversified 60/40 portfolio above to 3.92% (a drop of less than 10% - maybe living too long isn't such an issue for retirement plan sustainability, especially if we incorporate the odds of living an extra ten years!). Increasing the equity content to 100% gives a slightly reduced SWR of 3.83%
Stop focusing on the worst-case outcomes!
So far, we've only been examining worst-case outcomes. What if we evaluate the average outcome? The median case for our 60% (even more diversified) equity portfolio has a balance of £1.7m (in real terms) after 30 years.
The 100% equity portfolio has approximately doubled this, at around £3.4m - a big difference!
We are (not) the robots!
Unlike Kraftwerk's 1978 classic, humans are not robots, and we all come with our quirks and imperfections. Investors have many biases, some contributing to the investment versus investor behaviour gap (we covered the behaviour gap in our 4% "rule" series). Guests on a recent Rational Reminder podcast discussed retirees holding 100% equity portfolios. Retirement researcher David Blanchett suggested that:
"no person that works with real humans would suggest that!"
Vanguard produced a report showing annual returns over the last 120 years, and the worst year
for their 100% equity portfolio at -41% is around 10% worse than the 60% equity portfolio (-31%).
This additional 10% fall may cause the investor to capitulate and sell their investments.
If a retiree had a financial adviser, maybe the adviser could prevent the client from doing this, or perhaps they wouldn't.
The Vanguard chart highlights another important point—the extra return you receive for each additional unit of risk reduces as the portfolio equity content increases. For example, increasing the portfolio equity content from 50% to 60% equities increases the additional average return to 0.4%. Increase from 90% to 100% equities, and the additional return is only 0.2%. Legendary investor and internet pugilist Cliff Asness recently examined this.
As the Timeline chart below shows, equity drawdowns can be extended (much longer than the one-year periods in the Vanguard example above) and painful.
In another blog, we discussed the difficulty of sticking to the plan when portfolios go sideways for a few years. Let's examine the challenging period from 2000 to 2010, during which investors had to contend with the bursting of the .com bubble and the aftermath of the Global Financial Crisis (GFC). We will first analyse the whole decade, using portfolios from the (even) more diversified approach above. We can see a reasonable difference in cumulative return when comparing 60% (89%) with 100% (70%) equity portfolios over the decade, but the benefits of adding bonds aren't overwhelming, and both examples generated reasonable returns over the decade.
If we use portfolios that are less diversified (such as the "No Brainer"), adding bonds to a 100% equity portfolio makes a much bigger difference (in relative terms) to the outcome - the annualised return for the portfolio containing 60% equities being almost four times higher (3.8% versus 1.08%) when compared to the 100% equity portfolio. The 100% equity portfolio in this example effectively went nowhere for the whole decade! And that's not forgetting these numbers don't cater for clients drawing down on their retirement pot and potential adviser fees.
Would 100% of investors remain fully invested during this period?
Returning to the (even) more diversified portfolios, let's now look at the two particularly tricky periods during the decade, starting with the aftermath of the .com bubble. We will first cover the period from January 1, 2000, to December 31, 2003. The difference in outcomes is dramatic, with the drawdown of the 100% equity portfolio around three times greater than that of the portfolio with 40% bonds.
Now, let's look at the GFC, using the period from 1st June 2007 to 31st December 2009. Again, we see peak-to-trough drawdowns that are almost twice as bad for the 100% equity portfolio versus the portfolio containing 40% bonds.
Of course, bonds don't always ride to the rescue, but both bands and equities falling significantly together are rarer than people might think. 2022 is often quoted as an example, but with global equities down around 8% over the year (far less than the .com and GFC falls shown above), bonds falling around 12% meant that a 60/40 portfolio was down less than 10% over the year - some would class that as noise. The (even) more diversified portfolio was down by less than 6%, which shows the benefits of diversification.
Conclusion
There is a lot to take away from this. Let's first summarise our findings on both a portfolio and personal level.
Portfolio:
Over a 30-year horizon, a 100% equity portfolio doesn't necessarily lead to a higher sustainable withdrawal rate compared to a portfolio containing 60% equity and 40% bonds, and it is often worse.
But it does tend to lead to a better median outcome.
As equity content increases, the additional return tends to reduce as the equity content in the portfolio approaches 100% equity.
Personal:
A 100% equity portfolio can increase the chance of a "lost decade," especially when fees and retirement withdrawals are considered. Some investors may struggle with this and sell down their portfolios, effectively blowing up their retirement plans.
Many investors have a breaking point in terms of how far their portfolio falls before they capitulate. The additional drawdowns that a 100% portfolio tends to experience versus a 60% equity portfolio (see our .com bust and GFC examples above) may again cause the investor to capitulate.
Based on the above, when might a 100% equity portfolio in retirement make sense? If all of the below apply:
Your retirement pot is very large compared to your planned withdrawals, meaning there is very little chance of running out of money - your planned withdrawal rate is much lower than the historical SWR, and you don't necessarily need to worry about your retirement funds running out in a worst-case scenario.
Maximising your legacy is a big objective for you, and you care more about improving median/best-case outcomes and maximising the retirement pot at your death. It's worth pointing out that the investment horizon, in this case, effectively becomes much longer than your lifespan (assuming your descendants plan to remain invested).
You are very comfortable with large portfolio drawdowns and the increased risk of the portfolio balance going nowhere for extended periods of time.
Then we could understand that a 100% equity portfolio is a consideration.
But we believe this is a small percentage of retirees. For the majority, their situation tends to mean that a portfolio containing bonds is more likely to lead to a better retirement outcome, and a portfolio containing 100% shares is an example of a retirement planning idea that sounds good in theory but less so in practice.
Want to find out more?
If you want to learn more about building a robust portfolio that will give you the best chance of retirement success, please contact us.
About us
The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide financial advice on pensions, investments, and inheritance tax.
Our office telephone number is 01932 645150.
Our office address is No 5, The Heights, Weybridge KT13 0NY.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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