An all-stock investment strategy creates more wealth than portfolios mixed with bonds, research shows

• A study said a stock-only strategy offers better returns than a 60/40 mix over the long-term.
• Splitting investments between domestic and international stocks can average over $1 million by retirement.

Long-term investors who invest solely in equities can expect much higher returns than those who diversify with fixed-income, a new study has found.

The research breaks away from the traditional idea that the best way to safely maximize returns is to put 60% of holdings in stocks and 40% in bonds.

"Given the sheer magnitude of US retirement savings, we estimate that Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy," the researchers said.

By running simulations that model a US household's earnings and investing practices over a 40-year period, the study showed that putting 50% of a portfolio in domestic stocks and 50% in international stocks will create $1.07 million in wealth on average by retirement. Focusing on domestic stocks only will yield $1.05 million.

Both beat the traditional 60/40 equity-bond mix, which averaged $760,000, while a strategy focusing only on bonds would come out with only $280,000.

The researchers acknowledged that mixing in bonds provides some level of psychological relief for investors, given the risk of sell-offs and short-term pain that come with equities.

But while stocks experienced bigger short-run downswings, that didn't offset long-term gains, according to the study. In addition, it also found that stocks and bonds often moved in the same direction, eroding the case for diversification, and that spreading out investments geographically worked better.

"Bonds add virtually no value for the lifecycle investors we consider," the researchers wrote.

In recent years, the 60/40 portfolio has come under fire, as its performance has buckled under increased headwinds for both stocks and fixed-income. This wasn't helped by the massive Treasury meltdown last year and earlier this year.

Disagreement over the strategy has spread across Wall Street, with BlackRock calling for a new approach, while Vanguard expects the portfolio mix to keep providing strong returns over the next decade.

Some analysts, such as Goldman Sachs' Christian Mueller-Glissmann, have touted turning to separate assets altogether, such as gold and private investments, and options.