Newswise — Conventional wisdom holds that investors need a diversified portfolio of stocks and bonds to obtain investing success. But new research by several professors from Butler University's College of Business suggests that conventional wisdom may be wrong.
Using both historical results and a simulation of thousands of possible outcomes, the professors discovered that for every possible 40-year period, an investor who was invested 100 percent in stocks until 10 years before retirement and then switched to bonds, enjoyed better returns than someone who had a more diversified portfolio.
"We found that a much greater emphasis on stocks throughout most of a person's investing career provided a much larger retirement portfolio than previously expected," said Steve Dolvin, one of the lead researchers and associate professor of finance at Butler.
The professors call this new approach the 100/10 Approach.
While the market may be volatile over a 40-year period, the research shows that increases and decreases in stock value eventually level out on the up side under the 100/10 Approach.
Dolvin credits this result with an investor's patience with the stock market. "By contrast, an impatient investor might pull out of the market when his or her stock was at a low point — getting only the downside and missing any chance of recovery. The volatility would not level out because he or she would come out of the market at the wrong point."
Dolvin says that even though the 100/10 Approach has been proven to work, it should only be used by educated investors that can avoid common behavioral errors.
Dolvin, CFA, is an associate professor of finance in Butler University's College of Business. He is in expert in initial public offerings (IPOs), investment banks, 401(k) plans, retirement investing and behavioral finance.
RSS