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Retirees should buy stocks, not bonds, study suggests

Bonds provide psychological comfort but the 60:40 strategy ‘comes at too high a price’ in investor return

The authors caution that stocks and bonds often fall at the same time, as in 2022. Photograph: iStock
The authors caution that stocks and bonds often fall at the same time, as in 2022. Photograph: iStock
Proinsias O'Mahony's picture
Proinsias O'Mahony
Sat Dec 16 2023 - 07:00

Forget bonds – retirees should go all in on global stocks. That’s the radical-sounding conclusion of a new study, appropriately titled Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice.

Looking at 38 countries over a 130-year period, it found an equity-only portfolio – half US stocks, half non-US – would, on average, be worth $1.07 million by retirement, compared with $760,000 for a 60:40 stock/bond portfolio. That divide widens if you stick with stocks during retirement. By the time you die, your portfolio is likely to be worth $3 million, compared to $1.3 million for the 60:40 portfolio.

It’s easy to scoff. After all, the best portfolio is not the mathematically optimal portfolio, but one that allows you to sleep at night.

The authors concede this point, admitting some “may abandon their investments rather than stay the course” due to the “psychological pain” resulting from equity drawdowns. Still, they caution stocks and bonds often fall at the same time, as was the case in 2022.

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Additionally, the odds of running out of funds during retirement are much lower in an all-stock portfolio (funds were depleted in 8 per cent of simulations, compared with 16 per cent with a 60:40 portfolio).

Bonds provide psychological comfort but the 60:40 strategy “comes at too high a price” – advice that may resonate if you’re an investor with a strong stomach.