100% Equity Portfolios For Retirement : Plausible In Theory. Practical In Reality?

Traditional asset allocation principles typically recommend having a balanced allocation to equity and debt prior to retirement. The focus then shifts to having an outsized allocation to debt post retirement. But the 2025 edition of a 2023 American research paper titled Beyond The Status Quo : A Critical Assessment Of Lifecycle Investment Advice advocates a 100% equity portfolio for retirement. It is recommended for both the accumulation and distribution phases in retirement. But a critical evaluation of the findings of the paper would show that a 100% equity portfolio for retirement is not always practical. And in today's post I will show why that is the case. 

What The Research Paper Says

The paper considers a couple investing for retirement between the ages of 25 and 65. It considers monthly stock return data between 1890 and 2019. It opines that a portfolio comprising 33% domestic stocks and 67% overseas stocks has less severe worst case outcomes and greater longevity. The expected final value of such a corpus has been shown to be 40% higher than a traditional 60-40 stock-bond portfolio on average. 

This is understandable since a 60-40 portfolio lowers exposure to equity. This reduces the expected return of the portfolio. The paper therefore opines that the all equity portfolio allows us to save less for retirement (as little as 10% of income) and still end up with a larger corpus. It also suggests that we are likely to be able to leave a significant inheritance behind for our descendants. 

Finally the paper accounts for sequence of returns risk by simulating returns during prolonged historical downturns such as The Great Depression (1930s) the Stagflation era (1970s) the Global Financial Crisis (2008-2013) and so on. Even with such catastrophic sequences of return, the all equity portfolio has been shown to do better. This is evident from the fact that the all equity portfolio resulted in lesser instances of complete portfolio failure relative to a balanced stock-bond portfolio. Let us now understand how relevant the findings of the paper are likely to be in the real world. 

The Theoretical Case For An All Equity Portfolio

In theory an all equity portfolio may be justified if one has a purely aggressive risk profile. Someone with a purely aggressive risk profile would have an immense capacity and innate willingness to bear investment risk. One is therefore said to have a purely aggressive risk profile if they satisfy every single one of the conditions given below.

1.  Significant job security and stability of income 

2.  Monthly savings rate of 50% or more of take home income

3.  At least one year of expenses available as liquid savings

4.  Multiple decades of experience with market linked investment products

5.  No financial dependents

6.  Be readily willing to hold or add to investments during a drop in their value

7.  The individual must remain completely unaffected psychologically when financial losses are suffered

8.  Evaluate all options available thoroughly and understand the risks involved before making money decisions

Such individuals may be justified in running an all equity portfolio when accumulating for retirement. 

After retirement, the conditions to justify an all equity portfolio would change. The individual must have a liquid net worth that is worth at least 4 to 5 times their required retirement corpus. It therefore allows room for the majority or entirety of the market linked portfolio to be allocated to equity. The arguments listed and explained above may make it seem plausible to run an all equity portfolio for retirement. But I will now show how real world dynamics render an all equity portfolio completely impractical.

Why Reality Beats Theory 

Eight conditions were defined earlier for an all equity portfolio to be justified during the accumulation phase of retirement. Most individuals would be able to satisfy some or most of those conditions. But no individual would practically satisfy every single one of them. Therefore it is near impossible for one to have a purely aggressive risk profile. Every individual would actually have a balanced risk profile with a slight preference for prudence or aggression. This means that running retirement portfolios with an allocation of more than 60% to equity must be given effect only after sufficient forethought. 

Only a trivially small number of people would be able to satisfy the prerequisite for running a 100% equity portfolio post retirement. Also most Indian retirees do not have a holistic understanding of the way equity works as an asset class. They are therefore likely to be ill equipped to handle the implications and risks of an all equity portfolio. So an all equity portfolio would be impractical post retirement as well.

Using an all equity portfolio post retirement also implies that portfolio withdrawals would be made from equity. But withdrawing solely from equity is dangerous since it is a volatile asset class. It is therefore vulnerable to sequence risk. A prolonged sequence of negative returns post retirement can be devastating both for the portfolio and the individual who owns it. Withdrawals must therefore be made from non volatile and highly liquid products in the corpus. Savings deposits, liquid funds and money market funds therefore become ideal avenues from which to make most of our withdrawals post retirement.

Practical Inconsistencies Within The Research Paper

The research paper implicitly assumes that investors remain rational and stick to their investment plans during the accumulation phase of retirement. It therefore does not account for instances of behavioral biases, panic selling, or a lack of discipline on the investor's part. Any or all of these typically occur at least a few times during an individual's accumulation phase. And such deviations are highly likely to have a materially adverse impact on the adequacy of the individual's retirement corpus. This renders running an all equity portfolio during the accumulation phase impractical.

The paper advocates that individuals can build an adequate corpus for retirement with a relatively low savings rate. This is attributed to higher expected returns which are probable with an all equity portfolio. But this could not be further from the truth. Higher investment returns cannot compensate for a low savings rate. A higher equity allocation may increase expected returns from the portfolio. But a subsequent market crash and/or prolonged bear market can decimate the portfolio. Most individuals may not be able to psychologically cope with such an eventuality. They may then reduce their equity allocation. This would naturally reduce expected returns over the long term. Individuals must therefore look to save at least 50% of their lifetime post tax income for retirement. 

The paper recommends using Social Security for stable income post retirement. Social Security is a government guaranteed, inflation indexed source of lifelong income. It therefore becomes a suitable proxy for the debt component of a portfolio post retirement. But India currently lacks an equivalent to Social Security. Indian retirees would therefore be better off using a dedicated debt component in their retirement portfolios. 

The paper recommends allocating 67% of the portfolio to international equity. This proves to be a significant challenge in the Indian context. Economic and market regulations in India set clear ceiling limits for mutual funds that invest in international equity. Ceiling limits have been defined both for individual AMCs and the mutual fund industry as a whole. The industry wide ceiling limit was hit sometime around February 2022. A few AMCs are yet to hit their individual ceiling limits. But they only accept fresh investments during brief windows that open up sporadically. 

There is of course the option to hold individual overseas stocks through international brokers. But this proves to be an expensive affair for most Indian investors when costs, foreign exchange risks and taxes are accounted for. Most of the incremental return from overseas stocks (if any) are likely to be eaten away by these forces. This usually makes allocating anything more than 10% of the portfolio to international equity a losing proposition for most Indian investors. This is even more true given the fact that most Indian investors are likely to meet their needs for future consumption in India. Including international equity also makes managing and rebalancing the portfolio more complex. So even a 10% allocation to international equity must be given sufficient forethought. 

Summing Up 

The core takeaway here is that it is not practical to run all equity portfolios either before or after retirement. A lot of things in personal finance may look rational and plausible on paper. But what looks rational on paper may not be reasonable in the real world. Our retirement plans must therefore be centred around what is reasonable. Because what is reasonable is also likely to be possible in reality. And what is possible is more likely to be adhered to.