Statistically, a 100% stock approach beats all other mixes more than 90% of the time if it’s held for longer than 10 years. This is a thesis supported by the famous work of Stocks, Bonds, Bills and Inflation, an annual book published by Chicago-based research firm Ibbotson Associates Inc.

Since the early 1900s, a portfolio of North American equities — U.S. equities, specifically — has produced long-term returns superior to any other asset class or any combination of asset classes. The inference: if you have a long time horizon, why buy anything else?

Advisors seem to be split on the 100% equities model. Some say the approach has a place if the client has a time horizon of 10 or more years. Others say 100% equities have no place in modern-day portfolio management, regardless of the time horizon. In the end, there may be no right answer.

At the heart of this question are two assumptions: one, individual investors can emotionally deal with long time horizons; and, two, equities are the superior asset class.

We know that, statistically, of the three financial assets (equities, fixed-income and cash), equities carry the greatest risk. Intuitively, they should be the best-performing — if for no other reason than higher-risk assets theoretically deliver higher returns.

The superior performance proposi-tion derived from the Ibbotson work examined the performance of U.S. equities vs U.S. bonds and U.S. cash over long periods.

However, not all equi-ties markets performed as well. You may be surprised to learn, for example, that average Canadian equities underperformed Canadian bonds through much of the 1980s. And, while Canadian stocks did well in the 1990s, they fared only slightly better than Canadian bonds.

Those who favour a 100% equities approach recommend that investors diversify globally. By doing so, you reduce exposure to energy and commodities that played a major role in Canadian equi-ties’ performance in the 1980s and the early 1990s.

Having said that, some foreign equi-ties markets had dismal track records in the 1990s and into the turn of the century. Japan, in particular, is one that comes to mind. The Nikkei 225 index is now trading at less than half the value it was trading at in 1989.

In fact, unless there is an unprecedented rally in Japanese stocks over the next few years, the Nikkei will have spent the past 20 years underwater. Ask a long-term Japanese investor whether holding an all-equities portfolio is a good idea.

So, is 10 years a reasonable period? When you consider that the average holding of a mutual fund is two years, it is difficult to accept the argument that “long term” actually means 10 years.

Ron Meisels, one of Canada’s top technical analysts and publisher of Phases & Cycles, draws attention to a secular bear period that lasted six years (1968-1974), followed by a calming period of eight years (1974-1982) to absorb the effects of the drastic collapse. How many advisors believe their long-term clients would have weathered that 14-year storm? And how many of your long-term clients weathered the bear market of 2000-2003?

So, we have two sides of a coin: a diversified portfolio with a combination of assets, and an all-equities portfolio for an investor with a time horizon of more than 10 years.

In fairness, there is no compelling argument against the 100% equities model from the performance side of the equation. That is, save for the comments that have already been made here about finding yourself in markets in which higher-risk assets are not performing in line with theoretical expectations — such as Canada in the 1980s and Japan for the past 18 years.

I fall into the diversified camp, for reasons not related to return but rather to risk. If a sharp decline in the equities market causes an investor to sell in a panic, the concept of superior returns becomes a moot point. You get those returns only if you stay invested.

It’s one thing for a client to say, “I can withstand the volatility of an all-equities portfolio when the markets are relatively stable.” However, it is quite another to accept that position when markets are in free fall. I have been there, and have dealt with clients and advisors who thought they were capable of tolerating much greater risk than they actually could.

@page_break@In the end, isn’t the objective to help clients stay invested for the long term? That’s a full-time job, because for most clients, the idea of a long time horizon is a grey area.

Having said that, the smoother the ride for the client, the easier it is to leave emotions at the door. Portfolio management helps you achieve that goal because it is all about structuring a portfolio with the least amount of variability over long periods.

And there’s the rub. If you are looking only at pure return, the diversified mix may well underperform the all-equities portfolio.

But if you understand the value of risk reduction, on a risk-adjusted basis the diversified mix will outperform an all-equities portfolio almost all the time. IE