In the long run stocks outperform bonds and cash. So why not put your entire portfolio into equities? For one, who wants to put all their money into something that can and did drop more than 30% in the course of a year? Remember the crash of 1987, or the internet bust in 2000 or the financial meltdown in 2008? How about the “lost decade”, the first ten years of the current millennium during which large-cap stocks provided no return?
Consider the other end of the spectrum. There are investments in which no one ever lost money, such as FDIC insured bank accounts and U.S. treasury bonds held until maturity. Very safe, but there have been spells during which they failed to keep up with inflation. We save and invest to grow wealth. Who wants to park money in a vehicle practically assured of losing spending power?
To limit potential damage from any single pitfall, you are best served by a mix of stocks and bonds versus an all-or-nothing approach. How much to put into each asset class is the essence and end result of an assessment of your risk tolerance.
You may already know your risk profile. Perhaps you completed a questionnaire online or with a broker. Maybe after decades of investing you know the proportions of stocks and bonds you like to hold.
If you are unclear about your tolerance for investment related risk, take our quiz to get a sense. There are more comprehensive tests elsewhere, and your own experience should trump a group of questions. But you may get some perspective from the results.