Are You Investing Too Conservatively?

In volatile markets like this one, the idea of a pure-stock portfolio may seem unnecessarily risky. According to a recent Fidelity survey of its 401(k) participants, 18 percent of investors had all their money in stocks as of the end of March, compared with nearly 35 percent at the end of 2001.

But if you're a young investor with decades of compounding growth ahead of you, going all-stock isn't as risky as you might think. Says 20-something blogger Amateur Asset Allocator, who sleeps soundly with only 10 percent of his Roth IRA in bonds: "Young investors are taking the much larger risk of not having enough money to retire comfortably in return for reducing short-term portfolio volatility."

Surprisingly, if you compare 401(k) investors in their 20s with those in their 30s and 40s, the 20-somethings actually have less money in stock funds.

Over long stretches of time, it's clear that stocks outrun bonds and any mixed portfolio made up of stocks and bonds. Consider this research from Morningstar: Since 1926, stocks have returned an annual 10 percent. During the same period, bonds gained an annualized 6 percent and cash just 4 percent. With inflation averaging 3 percent annually since 1926, your real, after-inflation return drops to 7 percent for stocks, 3 percent for bonds, and just 1 percent for cash.

There's more: Over rolling 10-year periods, including periods that span the Great Depression, stocks have never lost more than an annualized 1 percent. And over 20-year periods, stocks have never lost money.

That's not to say it won't be a bumpy ride. However, as Elizabeth Ruch, a senior financial adviser with Waddell & Reed, points out, "The younger you are, the more aggressive you can be. A 100 percent equity portfolio is going to have a lot of ups and downs, but if you're in your 20s, you can take it."