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Financial Literacy

What is a 100% Equities Strategy?

Most investors who set out to diversify their portfolio end up investing in debt securities in some capacity. But not everyone. What is a 100% equities strategy? As the name implies, it’s an investment philosophy that has zero interest in debt securities. Instead, you’re fully vested in stocks or private equity. It’s a growing trend among many retail investors, as well as some fund managers. 

There’s some controversy surrounding a 100% equity strategy. Namely, it flies in the face of conventional wisdom about portfolio diversification. Even if you’re spread out among various sectors and market caps, a bear market could send your entire portfolio spiraling. Here’s what you need to know about the 100% equities strategy, how it works and what to beware of.

What is a 100% equities strategy?

Breaking Down a 100% Equity Portfolio

On the surface, a 100% equity portfolio seems easy enough to understand. It’s all stocks, right? Sure! But there’s more to it than that. You need to ask what kind of stocks. That means harkening back to an original investing thesis such as dividend vs. growth stocks, or evaluating criteria for individual companies. 

Because you’re open to more risk without debt security diversification, it’s important to put more thought into strategy. This is most often the case in managed funds with a 100% equities approach. For example, an ETF that tracks the S&P 500 small caps has a clear metric and mission. If you’re someone who thinks, specifically, that small caps in the S&P 500 will outperform, you’re likely to believe in this equity strategy.

Along with strategy, consider the scale of your portfolio. For example, you might have a 401(k) that’s fully diversified with stocks, bonds, commodities and cash. You might also have a brokerage account that’s only equities. Within that account, you’re practicing a 100% equities strategy—but your greater portfolio is still diversified. 

100% equity portfolios can vary greatly depending on philosophy, strategy and scale. Those interested in this approach need to consider each variable carefully. 

What are the Advantages of All Equities?

The chief advantage of an all-equity portfolio rests in rate of return. Compound interest is a powerful tool in wealth generation, made powerful by the many compounding opportunities offered by securities. Consider the 10x ROI of a growth stock that becomes popular in just a few short years. Or, think about the power of a 3% dividend reinvestment that buys more dividend-paying shares quarterly. Compounding always beats the fixed interest rate of debt securities.

Equity can also appreciate. The stock you buy today for $50 could be worth $150 in the future. Or, it might pay a dividend or merge with another company to net you higher-value shares. Or, the company might announce a stock split. Equities have so many ways to gain value, whereas most debt securities remain static. 

Finally, liquidity is a powerful benefit in favor of equities. You can buy or sell stocks at any time. This gives you the power to pivot when market forces dictate or take profits when a company does well. In times of volatility, you’ll also have the power to sell or minimize exposure. There’s a lot of room to be agile with an all-equity portfolio. 

The Dangers of a 100% Equities Strategy

With high reward comes high risk. Equities can be volatile and come with no shortage of risk. If you’re allocating 100% of your portfolio to equities, you need to have a strong tolerance for risk. Just as stocks appreciate, they can also depreciate. Without strong self-control to weather losses, you could find yourself pulling the ripcord too soon and selling at significant losses. 

A bear market is another major concern for equity investors. Many sectors suffer mightily when the market turns sour, which can result in years of gains wiped away. Moreover, it can take years for stocks to rebound. If you don’t have a long time horizon, your retirement savings could be a shell of what they once were (or could be). 

Perhaps the biggest drawback of 100% equities is psychological. Many investors don’t draw the line between tinkering with their portfolio and rebalancing as-needed. The result is over-thinking your actions. Selling at a loss. Incurring capital gains without offsetting losses. There are thousands of companies to invest in, and FOMO or over-thinking can loom over you, making it seem like there’s always a better option out there. 

How to Hedge Against Risk Using Only Equities

To protect yourself against the risks that come with an all-equity portfolio, consider adopting these smart practices, used by experienced investors:

  • Spread your investments out across different sectors, to avoid overexposure. Weight your portfolio as equal as possible across 5-8 sectors (or all 11). 
  • Mix in blue-chip companies with small-to-medium-sized caps. A few bellwethers can right-size a portfolio in times of turbulence.
  • Rebalance at select times throughout the year, such as quarterly. In the meantime, dollar costs average and contribute regularly.
  • Avoid an all-stock portfolio if you’re over the age of 45 or plan on retiring within 10 years. Volatility is too dangerous the nearer you are to retirement.

These tips seem simple, and it’s because they are! A 100% equity portfolio will work hard for you, if you put it in a position to grow safely. 

Be Mindful of Markets and Positions

What is a 100% equity strategy? Some might call it a gamble. Others believe it’s the best way to generate wealth. It all depends on your risk tolerance and time horizon, as well as market conditions. In a bull market, the 100% equity strategy could dramatically increase your ROI. In a bear market, you might find your securities lagging behind average market returns. Context is everything.

That is why it’s so important to continue expanding your investing knowledge. This helps you build more experience to make better trading decisions. Therefore, sign up for the Investment U e-letter below.

Thankfully, there are ways to structure a strong equities-only portfolio to safeguard you against risk—and to capitalize on all market conditions. Diversify across sectors, build around bellwethers and rebalance to keep your wealth distributed appropriately. A well-managed portfolio of equities is a powerful driver of ROI.


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