Understanding the 100% Equities Strategy

Investing in stocks can be approached in various ways, and one such method is the 100% equities strategy. This approach entails putting all investable cash solely into stocks, without considering other types of investments like bonds or derivatives. It's a straightforward concept: if you're employing a 100% equities strategy, your portfolio consists entirely of stocks.

Key Points about 100% Equities Strategy

• Exclusive Focus on Stocks: The core principle of a 100% equities strategy is to invest only in stocks. This means no bonds, cash equivalents, or alternative assets. By concentrating solely on stocks, investors aim to capitalise on the potential growth opportunities offered by equities.

• Common in Mutual Funds: Many mutual funds follow this strategy, meaning that when you invest in them, your money is solely directed towards stocks. These funds might have a mandate to allocate a certain percentage (often around 80%) to equities, but in practice, they often invest nearly all of their assets in stocks. Investors opt for these funds for their simplicity and the potential for higher returns compared to balanced or fixed-income funds.

• Risk Considerations: Stocks are generally considered riskier investments compared to bonds or cash. While a diversified stock portfolio can mitigate some risks associated with individual companies or sectors, market risks still exist. This means that investors adopting a 100% equities strategy should be prepared for fluctuations in the market. They must also be aware of company-specific risks, industry risks, and broader economic risks that can impact stock prices.

Types of 100% Equities Strategies

Within the realm of 100% equities strategies, there are several subcategories, each with its own investment focus and objectives:

• Growth: Growth investing targets companies with high potential for revenue and earnings growth. These companies often represent emerging technologies or innovative industries. Investors in growth stocks are typically comfortable with higher-risk investments as they seek out companies that can deliver above-average growth rates.

• Value: Value investing involves identifying stocks that are undervalued compared to their intrinsic worth. This strategy relies on fundamental analysis, focusing on metrics like price-to-earnings ratio, price-to-book ratio, and free cash flow. Value investors believe that the market sometimes undervalues certain stocks, providing opportunities for long-term gains as the market corrects itself.

• Income: Income investing prioritises current income generation from investments. This category often includes mature companies that pay consistent dividends. Examples include real estate investment trusts (REITs) and master limited partnerships (MLPs), which are structured to provide high levels of income to investors. Income investors often seek stability and steady cash flow from their investments.

• Market Capitalisation: Capitalisation refers to the size of a company, typically categorised as large-cap, mid-cap, or small-cap. Large-cap companies are often more stable, with established businesses and steady earnings. On the other hand, small-cap companies are considered riskier due to their early-stage development. Investors may choose to focus on a specific market capitalisation category based on their risk tolerance and investment objectives.

Why Diversification Matters

While a 100% equities strategy can offer significant growth potential, it's important to remember the importance of diversification. Diversifying across different asset classes, including bonds and cash equivalents, can help mitigate risks associated with a purely stock-based portfolio.

A well-diversified portfolio can help spread risk and reduce volatility, providing a more stable investment experience over the long term.

Conclusion

A 100% equities strategy is a straightforward approach to investing, focusing solely on stocks without diversifying into other asset classes. While it can offer high growth potential, it also carries higher risk compared to diversified portfolios.

Understanding the different types of equities strategies can help investors align their investment objectives with their risk tolerance and financial goals.

By carefully selecting investments that match their investment objectives and risk tolerance, investors can build a portfolio that suits their needs and helps them achieve their long-term financial goals.