Is it time to say goodbye to bonds?

A new study suggests that you don't need to hold bonds before you retire. Instead, it's best to keep everything in stocks, even after retirement, until the day you die...

There Is No Alternative (TINA) seems to be making a comeback. Years ago, when interest rates were close to 0%, stocks appeared to be the only sensible option available to investors. A new study has gone one step further – according to the researchers, you should not own any bonds at all in your old age. Instead, the researchers advocate for a portfolio consisting solely of stocks – not only while building your portfolio but also after retirement, until your death (source).

They recommend that you hold one-third of your assets in US stocks and two-thirds in stocks from other regions all the time, irrespective of how old you are.

A historical analysis spanning more than 130 years

The researchers analysed equity and bond yields from 39 countries over the period 1890-2023. The main conclusion they drew focused on bonds being ineffective in terms of diversification, as they tend to move in line with stocks over the long term while offering low returns at the same time.

The numbers speak for themselves. Across the sample as a whole, bonds yielded a return of just 0.95% per annum on average after inflation. This contrasts sharply with returns of 7.74% for US stocks and 7.03% for international stocks. The significant difference raises doubts about the traditional advice to hold fewer stocks and more bonds as you get older.

Belgian pensions are under pressure

This research is particularly relevant for Belgian investors. In view of an ageing population and growing pressure on the pension system, we are increasingly being obliged to take responsibility for our own pension savings. The first pillar (state pension) and the second pillar (such as group insurance through the employer) are often not enough to guarantee a comfortable retirement. The third pillar – individual pension savings and investments – is becoming increasingly important. Furthermore, we are living for longer than ever before. This means your investment horizon remains surprisingly high once you've retired – long enough for stocks to continue to play their role as a growth driver. Researchers indicate that a significant reduction in bonds could, in fact, pose a greater risk.

Finally, you still have succession planning to think about. For many individuals, their wealth isn't just meant for their own retirement, but also for the next generation. In such a case, your time horizon is not determined by your own age, but by the ages of your children or grandchildren. And that's where the huge advantage of stocks come into their own.

Why stocks don't always work

It's not always so black and white, however. The issue with the new research is that it relies on historical data – and the past is no guarantee for the future. The study also emphasises that investing all of your money in stocks is far from risk-free. Previous research indicated that investors holding a portfolio full of stocks underperformed inflation in 12% of all possible 30-year periods (from 1841 onwards) (source). In other words, one in eight investors lost purchasing power, despite an investment horizon spanning three decades. Historically, stocks have been the best-performing asset class, but probability is by no means the same as certainty.

The lifecycle strategy: not perfect, but logical

Most financial advisers still use the traditional lifecycle strategy, where the percentage of stocks lowers gradually as you get older. A widely-used rule of thumb is '90 minus your age' or '100 minus your age' for the percentage of stocks.

This strategy is based on a simple principle: the less time you have to recover from a possible market crash, the better it is to build in more security. If you still have income from work, you can absorb fluctuations in your investments. As soon as you start relying on your assets to maintain your standard of living, however, any significant downturn becomes that much more painful. Critics of the 100% equities strategy also highlight that bonds are not only meant to generate returns but also offer stability and peace of mind. Bonds, and high-quality government bonds or inflation-linked bonds in particular, can act as a valuable buffer in times of stress on the stock markets.

A further observation is the current valuation of stocks. This raises the question: if stocks are relatively expensive now, is it the right time to embrace a 100% equities strategy?

Go all in on stocks, or not? Here are a few useful tips

1. Know your risk tolerance

A 100% equities strategy may sound great in theory, but in practice it is a different story. Investing solely in stocks requires nerves of steel. If you feel the urge to engage in panic selling during a crisis, a 100% equities portfolio may not be for you. Emotional decisions are the biggest enemy of successful long-term investments.

2. Look at your pension income as a whole

If you have the prospect of a solid state pension, have paid off your mortgage in full, and have built up a top-notch group insurance policy, you can afford to take more risks with any additional investments. If, on the other hand, you mainly rely on what you build up yourself, it is advisable to exercise caution.

3. Build up a sufficient savings buffer

Even if you opt for a high percentage of equities, it makes sense to hold a significant share in cash or conservative investments.

4. Diversification is key

Make sure you go for wide-ranging diversification if you opt for a high percentage of stocks. You can achieve this by investing in diversified ETFs in both developed and emerging markets, for example.

5. Adapt your strategy to suit the circumstances

If you find that your assets more than suffice in your retirement and you wish to pass some on to your children or grandchildren, your investment horizon will extend well beyond your own lifetime. In such a case, you can continue to take more risks. On the other hand, if the markets have risen sharply and your financial goals have been achieved, you could consider locking in any additional profits.

Before investing, be sure to read up on the main characteristics and risks of financial instruments.

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