RECOMMENDED PORTFOLIO ALLOCATIONS
What percentage of an investor’s portfolio should be invested in stocks?
The answer can be seen in Table 2-2, which is based on standard portfo-
lio models incorporating both the risk tolerance and the holding period
of the investor.^7 Four classes of investors are analyzed: the ultraconser-
vative investor who demands maximum safety no matter the return, the
conservative investor who accepts small risks to achieve extra return,
the moderate-risk-taking investor, and the aggressive investor who is
willing to accept substantial risks in search of extra returns.
The recommended equity allocation increases dramatically as the
holding period lengthens. Based on the 200 years of historical returns on
stocks and bonds, ultraconservative investors should hold nearly three-
quarters of their portfolio in stocks over 30-year holding periods. This al-
location is justified since stocks are safer than bonds in terms of
purchasing power over long periods of time. The historical data suggest
that even conservative investors should hold nearly 90 percent of their
portfolio in stocks for these long horizons, while the analysis indicates
moderate and aggressive investors should have over 100 percent in eq-
uity. Borrowing or leveraging an all-stock portfolio can achieve this allo-
cation, although if such borrowing is not desired, investors with these
preferences would do quite well to hold 100 percent of their long-term
portfolio in stocks.
Given these striking results, it might seem puzzling that the hold-
ing period has almost never been considered in portfolio theory. This is
34 PART 1 The Verdict of History
TABLE 2–2
Portfolio Allocation: Percentage of Portfolio Recommended in Stocks Based on All Historical DataRisk Holding Period
Tolerance 1 Year 5 Years 10 Years 30 Years
Ultraconservative
(Minimum Risk)
Conservative 25.0% 38.7% 59.6% 89.5%
Moderate 50.0% 61.6% 88.0% 116.2%
Aggressive Risk Taker 75.0% 78.5% 110.1% 139.1%9.0% 22.0% 39.3% 71.4%(^7) The one-year proportions (except minimum risk point) are arbitrary and are used as benchmarks
for other holding periods. Choosing different proportions as benchmarks does not qualitatively
change the analysis.