Should you put 100% in any one asset or instrument?

I have a friend, whose only investment or savings or asset (whatever you may want to call it) is – his small business. He is basically all in as they say in casinos.

But he is an outlier and not the norm.

Most people (and I think 98-99%) don’t do that.

And to be fair, it is not advisable as well.

So, to answer the question in the title of this article – Should you put 100% in one asset or instrument?

The answer is No.

Even if you are 100% sure about the returns.

You might be right. But what if you aren’t? You cannot take a chance at complete ruin. Being all-in is glamorous in casinos and in Hollywood movies. But even the players only bet what they have with them in casinos and not things (assets and investments) outside it.

But what about assets like equities which have historically generated reasonably good and inflation-beating returns in the long term? Like 12-15%.

Does it not make sense to put everything into it?

Just because your car can do 150kmph does not mean you should drive at 150kmph all the time.

The same is the case with investing.

Coming back to the question of being 100% invested in equities.

The first thing is that equity is best suited for the long term. It can be very volatile and give negative returns in the short term. So, if you need money in the short term (say in the next 1 to 3-5 years), then it’s best to avoid equity or at least have a very small allocation to it.

But what about long-term goals or planned expenses? Those that are more than 5-7 years away?

Theoretically, you can do it and invest a high percentage in equity. But it’s still only for those who can live through volatility in short term and have other savings to take care of bad days.

But 100% equity is best left to professionals and not regular people. For the latter, they can consider the following as broad generalizations to decide how much to put in equity –

  • Goals in next 0-3 years – 0% Equity
  • Goals in the next 3-5 years – 0-20% Equity
  • Goals in the next 5-7 years – 20-50% Equity
  • Goals in the next 7+ years – 50-80% Equity

Remember that a high percentage allocation to equity should be considered only if it is allowed by your risk profile.

And for very long-term goals, let’s say those which are 10-12 years away, you can start big with equities and gradually reduce the allocation as years progress. Something like this for a 15-year goal –

  • 0-5 years – 100% Equity
  • 5-8 years – 80% Equity
  • 8-11 years – 70% Equity
  • 12th year – 60% Equity
  • 13th year – 40% Equity
  • 14th year – 20% Equity
  • 15th year – 0-10% Equity

As you can see, as you get closer to the goal day/year, it’s best to rebalance your portfolio periodically so that your portfolio does not start overemphasizing one asset disproportionately more than what is prudent then.

Sadly, many feel that equity investing is like gambling. There is nothing like that at all, to be honest. Due to this wrong comparison, many people don’t give equities the importance it deserves and miss out on the high returns that they can generate for them.

Investing isn’t gambling.

Gambling and investing are two very different things.

While the former is about playing for entertainment and that too with a small amount of money (that you are okay losing fully), investing is about building wealth over the years and achieving financial goals. These days, you don’t need to visit casinos to play as there are thousands of virtual online casinos available. My friends in the UK market tell me that there are lots of people who spend a lot of time on these, if for nothing else, then for entertainment and to try their luck every once in a while.

But playing for fun and thrills is okay. But full-time things are better left to the pros who know the risks and then get it.

Coming back to our discussion on being 100% in one asset.

You shouldn’t do it in a casino please. And even when it comes to established assets like equity, it’s not wise to be 100% in one asset.

Proponents of 100% equity will try to convince you otherwise, but they ignore human psychology. When markets are rising, then that is not a problem. But people get out of the market at precisely the wrong time, selling low and buying high when market corrections happen and things start falling apart. So, it’s challenging for most investors to stick with their investments that are falling for a few weeks let alone for a year or two during recessions.

So, while 100% equities aren’t the most practical solution, having an equity-heavy portfolio for long-term goals is still wise. But depending on your unique requirements and circumstances, you may have to decide on a different strategy. It’s best to talk to a financial advisor before making bold and large bets on any assets.

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