The 50/50 stock strategy investors could use for retirement

When planning for retirement, how much should investors devote to just equities? University of Arizona Associate Professor of Finance Scott Cederburg sits down with Yahoo Finance Live to share his top savings strategy: being all in on equities, investing 50% in domestic stocks and 50% in international stocks.

"Our study suggests throughout your entire life that you would be all equity. So that's going through to being 70, 80, 90 years old, you still get better outcomes compared with trying to diversify into the bonds," Cederburg discusses. "I think part of this is based on our data and our methods, bonds look riskier for long-term investors than I think was previously thought."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video transcript

- Well, a new study from the University of Arizona is debunking the commonly known retirement investment portfolios, saying there's one which reduces the risk of running out of money in retirement and sees major returns compared to the others. Let's bring in Scott Cederberg, a University of Arizona associate professor of finance and one of the researchers for this study, to discuss this more. So thank you for joining us this morning.

So for people who weren't familiar with this study, I mean, this included a range of different portfolio strategies, including the popular 60/40. But there was a standout here in this study. What was that, and is that something that people can still apply going forward?

SCOTT CEDERBURG: Interesting from our study, the conventional wisdom is that you should diversify across stocks and bonds and that maybe young people should invest more in stocks than older folks. What we find is actually, 100% equity into retirement and up through I guess passing away, does better than these balanced sort of age-based strategies.

One key to that is when I say 100% equity, you do need to diversify internationally. So like global diversification is very important. So our base case is thinking about 50% domestic stocks and 50% international stocks.

- That's interesting. A 50/50 split there. When you say that those 100% equities, domestic and international, do much better than some of the most diversified portfolios we have become accustomed to feeling a little more comfortable in, to what extent did the performance differ? I mean, how much better did they perform?

SCOTT CEDERBURG: Yeah. I think it's probably not surprising to people that during the working years, as they're accumulating assets, that an all equity strategy would give them more wealth at retirement on average. What we find is that it gives kind of an entire better distribution. So even the worst case scenarios tend to be better with the all equity strategy than with the balanced strategies.

And then what's really interesting is even through retirement, we're using kind of a simple 4% rule for a withdrawal strategy, but it extends to other withdrawal strategies. But the all equity investors are actually less likely to run out of money during retirement than those that are trying to diversify into, quote unquote, safer bonds.

So it really goes throughout the life cycle. They're safer even in retirement for retirees, as long as we're kind of thinking about eventual outcomes of retirees. I would say the one caveat is that if you think about drawdowns, So kind of if you get up to your peak and then kind of the biggest drop that you have during retirement, you're going to see larger drawdowns on average, kind of intermediate drawdowns with the all equity strategy.

You just kind of have the strategy. Like stocks tend to bounce back after crashes, and that's really what you're relying on if you're going to be an all equity strategy and try to capture the important gains that come along with that.

- And Scott, in terms of the international exposure, I noticed that in one of the mixes you had here on a performance spectrum, those that were comprised solely of developed country government bills saw the lowest returns. So for people who are trying to think of how to play the international market but probably more used to the developed markets there, how should they be viewing it? What are some of the standout either countries or areas that they should be looking at to really make the most of their portfolio?

SCOTT CEDERBURG: Yeah. So on the bills strategy, like that ends up being kind of terrible because bills are safe in nominal terms, like before inflation, but they really have a lot of risk if we're thinking about inflationary periods. And then we're studying internationally. Our sample is developed countries, but I think it could extend basically to a kind of a world global type of portfolio.

So for US investors, it's actually fairly close to just market weight global portfolio if we go 50% US and 50% international, and then we would think about just weighting things internationally by their total value, kind of by their total market cap from each country.

- And Scott, just to be clear, when you talk about an all equity retirement portfolio, what's the timeline we're looking at? You're not talking about people who are looking to retire in 10 years.

SCOTT CEDERBURG: Yeah. Our study suggests throughout your entire life that you would be all equity. So that's going through to being 70, 80, 90 years old. You still get better outcomes compared with trying to diversify into the bonds. And I think part of this is based on our data and our methods bonds look riskier for long term investors than I think was previously thought.

And we don't have to think very far back in the US, like 2021, 2022, if you held 10-year Treasury bonds, I mean, that's a super safe asset in some sense, but you lost 30% over a two-year period, and it's going to be very tough to get that back. So when bonds crash, they tend to not come back, and when stocks crash there, is a tendency that they typically do kind of bounce back. And so if you can ride out the kind of bad times, you end up better off, even through retirement, being an all equity strategy.

- So Scott, when things are uncertain here, especially if we do start seeing a sell-off potentially, depending on what happens with NVIDIA's earnings, et cetera, should people continue to stay with that equity portfolio given that that longer trajectory still will have them back on track, or should they perhaps revert to something less risky, that perhaps less returns, but at least a little less losses as well?

SCOTT CEDERBURG: Yeah. That's in some sense like the fallacy of what's tempting, is to kind of pull back when stocks start being choppy and going down. But really, the key is to stick with stocks. Like that's the only way to get these kind of long term safe returns, is if you do ride out the really bad times.

Because if you shift, if stocks go down and then you shift into something else, you're going to tend to miss the rebound. This would have happened in the financial crisis. This would have happened during the COVID period. But our overall sample, we have over 2,500 years, like country years' worth of data from developed countries. And this is just the tendency that we see throughout history and across countries, is that stocks tend to bounce back, and bonds tend not to.

- Some good takeaways there. Scott Cederburg, University of Arizona associate professor of finance. Appreciate the time today.

SCOTT CEDERBURG: Thank you.