Ben Felix: The Most Controversial Paper in Finance

Investing includes the art of asset allocation. That means investors shouldn’t just look for a diversified portfolio of stocks. Rather, they should own a variety of assets, balancing volatile stocks with less volatile assets like bonds.

That level of asset allocation can get incredibly nuanced. That’s because today’s assets include gold, real estate, cryptocurrencies, and even cash as a holding. But some investors still consider a stock-heavy portfolio ideal for investors.

That’s thanks to the long-term track record of stocks compared to bonds over a long timeframe. That’s why one recent paper suggested that investors simply hold 100% of their wealth in globally diversified stocks.

Such an approach will carry considerable risks. That includes overall stock market volatility. If the recent selloff spooked everyday investors with a partial position in stocks, a 100% allocation requires more patience.

The other problem with a 100% allocation? It leaves investors with no cash to add to the market when stocks are down. Forget being able to ease off of stocks in a roaring bull market and buy back in during fear. Instead, it means going along for the whole ride.

While the rise of ETFs makes it easy to build a global stock portfolio, ignoring other asset classes means potentially increasing returns and lowering risk.

To see the full danger of being fully invested in stocks at all times, click here.