All-Equity ETF Portfolio Doesn’t Add Up

One advisor ponders why a 100% equity ETF retirement portfolio is an interesting but flawed idea.

Reviewed by: Allan Roth
Edited by: Allan Roth

I was stunned when I recently downloaded the Fisher Investments 15-Minute Retirement Plan. It detailed its Monte Carlo simulation model, which showed portfolios of 100% stocks were safer than mixed portfolios of stocks and high quality bonds.

Following is a summary of the findings.

Fisher Modeling: Survival Rate Over 30 Years, Increasing With Inflation
Annual Withdrawal Rate 100% Stocks 70% Stocks 50% Stocks
10% 17.90% 1.80% 0.00%
7% 53.60% 35.50% 12.50%
5% 84.70% 80.40% 69.00%
3% 99.70% 99.90% 99.90%
0% 99.90% 99.90% 99.90%

The table above illustrates the survival likelihood of a portfolio withdrawal rate over 30 years, increasing with inflation.

For example, using a 5% annual withdrawal rate, a $1 million all-stock portfolio has an 84.7% likelihood of supporting a $50,000 annual withdrawal at year one. With 2% inflation in year one, that would be $51,000 in year two, etc. By comparison, a portfolio of half stocks and half bonds has only a 69% chance of supporting that withdrawal rate.

Only at a 3% withdrawal rate was the 100% stock portfolio oh-so-slightly riskier, with a miniscule 0.3% chance of failure versus a 0.1% chance for a blended mix. That’s a draw in my book.

Bonds: To Own Or Not To Own?

But it did get me to questioning whether I should increase my equity risk, which currently sits at only 45% of my portfolio. Should I abandon my bond ETFs in favor of all stock ETFs?

I’m a fierce defender of Monte Carlo simulation modeling, capable of running thousands of simulations, as a predictor of the future. I defended Monte Carlo simulations a decade ago after the 2008-2009 plunge arguing Monte Carlo modeling was far from dead.

But what I also found is that the assumptions going into the modeling are crucial for it to be useful.

Fisher Assumptions

I spoke to Aaron Anderson, senior vice president of Research at Fisher. He told me they used a 10% expected return for stocks (S&P 500 total return long-run average) and the yield of a 10-year Treasury bond for bonds. Anderson said he used an implied inflation rate of 2.01%, and disclosed the standard deviations that also concerned me. (Standard deviations are one measure of risk.)

Anderson confirmed he did not use what’s called “fat tails” in the distribution, which take into account that rare instances may happen more frequently than shown in a standard distribution.

Though I’m OK with the inflation rate, the forecasted midpoint of future stock returns is far more than aggressive. I pointed out to Anderson that historic inflation had averaged 3.11%, so with a lower inflation assumption, he was counting on real (inflation-adjusted) stock returns 1.10% greater than historic averages. Anderson agreed.

I asked whether fees were built into the modeling, and he responded that “neither fees nor market outperformance were factored into the model.”

3 Fatal Flaws

In the end, the argument for 100% stocks is flawed in three ways: withdrawal rates, faulty assumptions, and ignoring the magnitudes of failure.

First, I’m not in the least bit surprised that withdrawal rates between 5% and 10% annually have better chances with all stocks. If you withdraw at an irresponsibly high rate, you must also build an incredibly risky portfolio.

For someone 65 years old who has saved only $100 for retirement, I may suggest playing Powerball as the best chance to reach retirement goals.

Second, the return assumptions are too high for stocks and too low for bonds. Stocks are very richly valued today, and assuming even higher real rates going forward is aggressive. I’m with some experts who happen to think a real (after-inflation) stock return of 4-5% is more realistic than the 8% used in the model.

To ignore fees is even more aggressive, since outperformance (alpha) before fees is a zero-sum game. If Fisher outperforms, other investors must underperform, as brilliantly described in William Sharpe’s The Arithmetic of Active Management.

Fisher provided no evidence of outperformance, but an online estimated calculation of returns from 13-F filings indicates underperformance of 30 percentage points over the past seven years. Anderson noted they use the MSCI World Index as a benchmark, which is a fair point since they also hold international stocks.

And why only use the Treasury rate for the bond assumptions? U.S. agency bonds and corporate investment-grade bonds yield more. I’m a fan of CDs [certificates of deposit] that give even higher yields and the right to surrender with small penalties in order to earn more if rates go up.

But the most fatal flaw of all, in my opinion, is not addressing the magnitudes of failure.

It isn’t a binary succeed-or-fail rule. If someone is 100% in stocks and there is a plunge of 60-80% (less than the Great Depression) that doesn’t recover quickly, the magnitude of the failure is immense. And we know cutting expenditures will be next to impossible.

But if you were only 50% in stocks, you may be able to reduce spending in traveling, eating and other less painful consequences. If you were brave, you would have some fixed income to sell and buy more stocks after this great sale.

My Conclusion

The brochure had a footnote regarding the simulations that read, “Fisher Investments makes no claim to its accuracy.” I happen to concur with that statement.

Anderson told me Fisher doesn’t believe everyone should be 100% in stocks. That’s a good thing, because I’m going to stick with my 45% stock allocation of owning ultra-low-cost, tax-efficient and diversified index funds covering more than 10,000 companies across the globe.

I’ll use ETFs like the Vanguard Total Stock Market ETF (VTI) and the iShares Core S&P Total U.S. Stock Market ETF (ITOT) for U.S. stocks, and the Vanguard Total International Stock ETF (VXUS) and the iShares Core MSCI Total International Stock ETF (IXUS) for international stocks.

I’ll use high quality bond funds like the Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) for fixed income along with some CDs. And I’m going to locate the assets where they are most tax efficient, such as stocks in taxable accounts and fixed income in tax-deferred accounts.

My advice is to pick an asset allocation that meets both your willingness and need to take risk. People overestimate their risk tolerance after a nearly 11-year record bull market.

Also, commit to sticking with the allocation you pick. Make sure you’ll have the conviction to rebalance and buy more stocks when they plunge and go on sale. You can’t do that if you are 100% in stocks.

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.


Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter