A 100% equity portfolio isn't synonymous with recklessness. Backed by 28 years of historical data, this article shows that a strategy fully invested in stocks can be both diversified and high-performing. Backtests, comparisons, and concrete strategies: find out how to optimize an equity portfolio across market cap, sector, and geography.
Table of Contents
- Advantages of a 100% equity portfolio
- Risks of a 100% equity portfolio
- Investment horizon and equity portfolios
- Diversification within a 100% equity portfolio
- Market cap vs the US market
- Sectors vs the US market
- International diversification
- Currency risk
- Investing broadly in the global market
- Domestic market vs the US market
- Domestic & international vs the US market
- US & domestic vs the global market
- Market cap, sectors, and countries
- Best strategies recap
- Conclusion
- Frequently Asked Questions
- Sources and data
Advantages of a 100% equity portfolio
Investors who choose a 100% equity portfolio usually do so hoping for higher returns than other types of investments offer. Historically, stocks have delivered superior long-term returns compared to other asset classes. This is backed by extensive research, including that of J. Siegel, whom we've already covered in previous articles.
In addition, many companies regularly distribute part of their profits to shareholders as dividends. These dividends can provide a steady income stream on top of potential capital gains.
Risks of a 100% equity portfolio
That said, a 100% equity portfolio also carries higher risk. Stock prices can be volatile and subject to significant short- and medium-term swings. That volatility can lead to substantial losses, particularly if you need to withdraw capital while the market is down. People who have reached financial independence and started decumulating are especially exposed to this risk, we come back to it in the FAQ below.
Investment horizon and equity portfolios
This brings us to the question of investment horizon, the length of time an investor plans to hold their positions. The shorter it is, the higher the risk of loss. The trickiest stretch is under 10 years. I learned this the hard way myself, starting to invest in 2000: the period through 2010 was rough. In terms of timing, it would have been hard to do worse.
For investors with a longer horizon, on the other hand, a 100% equity portfolio can be entirely appropriate. Over the long run, stock volatility fades. It even drops below that of Treasury bonds beyond a 20-year holding period, something J. Siegel has also demonstrated.
Diversification within a 100% equity portfolio
Beyond time, the other fundamental piece is diversification. Sticking to a single asset class doesn't rule out diversifying within it. That means spreading investments across:
- different companies (obviously)
- different company sizes (large, mid, and small caps)
- different economic sectors
- different countries
There are several ways to go about it. The first is buying a broad ETF (like VT) that covers all these categories at once. The second is combining several ETFs to mix different asset sub-classes. The last is blending ETFs with individual stocks, or relying on individual stocks alone.
We already covered in our previous article these different approaches, along with the features, strengths, and drawbacks of sector, geographic, and market-cap ETFs. Let's now see what happens when we put them together.
Note that all backtest results below are expressed in CHF as the reference currency. In dollars or most other currencies, they would look even better, given the historical strength of the Swiss franc.
Market cap vs the US market
We saw in the previous article in this series that ETFs carry a significant large-cap bias, and that small caps tend to generate excess returns. Investing through a single broad ETF partly forfeits that potential. Using several "cap" ETFs dilutes that risk while theoretically improving returns.
Take VTI on one side, which represents nearly the entire US market across all sizes. On the other, use four ETFs to split the market into equal parts:
- Large caps: SPY
- Mid caps: IWR
- Small caps: IJR
- Micro caps: IWC
Each ETF is rebalanced once a year to represent 1/4 of the portfolio's value.
By giving smaller companies more weight, this strategy should outperform the broad market (VTI). Yet the result disappoints:
| 2004-2024 Backtest | CAGR | Sharpe |
|---|---|---|
| VTI | 8.85 | 0.53 |
| SPY+IWR+IJR+IWC | 7.63 | 0.43 |
That's hardly surprising: in our previous article we'd already found that the further down the market-cap ladder you go, the less faithfully ETFs capture potential excess returns. IWC is particularly affected, with average annual returns below 5% over this period, paired with much higher volatility (FR). We work around this by directly selecting Micro Cap stocks, using the same quality filter as in our previous article.
The results are noticeably more compelling:
| 2004-2024 Backtest | CAGR | Sharpe |
|---|---|---|
| VTI | 8.85 | 0.53 |
| SPY+IWR+IJR+Quality Micro Caps | 10.27 | 0.57 |
Why not focus solely on quality Micro Caps? That's an option, with a 13.4% CAGR and a Sharpe ratio of 0.62. But we can do even better.
Looking at correlations across the four sub-asset classes, the first three are strongly correlated with each other. Quality Micro Caps and the S&P 500 are the least correlated pair:
| Correlation | A | B | C | D |
|---|---|---|---|---|
| SPDR S&P 500 ETF Trust (A) | — | 0.95 | 0.9 | 0.66 |
| iShares Russell Midcap ETF (B) | 0.95 | — | 0.94 | 0.7 |
| iShares Core S&P Small Cap ETF (C) | 0.9 | 0.94 | — | 0.69 |
| Quality Micro Caps (D) | 0.66 | 0.7 | 0.69 | — |
Paradoxically, fewer instruments deliver better diversification. Focusing on SPY and quality Micro Caps improves both CAGR and Sharpe ratio at once:
| 2004-2024 Backtest | CAGR | Sharpe |
|---|---|---|
| VTI | 8.85 | 0.53 |
| SPY+Quality Micro Caps | 11.93 | 0.64 |
The CAGR is admittedly a touch lower than Micro Caps alone (13.4%), but the Sharpe ratio is noticeably better. In other words, at equal risk, this approach's return is optimal. The two sub-indices should be allocated equally: 50% SPY / 50% quality Micro Caps.
Compared to VTI, the gap is decisive: over 3 points of excess return and a substantially better Sharpe ratio. This approach effectively corrects ETFs' large-cap bias.
Sectors vs the US market
In our previous article, we saw that certain sector ETFs show relatively low correlation with the market and with each other, while still delivering strong risk-adjusted results. That's the case for QQQ (Nasdaq 100), VDC (Consumer Staples), and XLV (Health Care). These sectors, already backtested as part of PP 2.0, pair defensive positions with growth names, a combination that makes sense.
For the US market reference, we use SPY rather than VTI, since QQQ and XLV are built on very large companies.
The results are quite striking:
| 2004-2024 Backtest | CAGR | Sharpe |
|---|---|---|
| SPY | 8.54 | 0.54 |
| QQQ+VDC+XLV | 9.67 | 0.66 |
The three sector ETFs, equally weighted and rebalanced once a year, deliver not only higher returns than the market but a better Sharpe ratio too. The growth QQQ brings, combined with the defense of VDC and XLV, produces a remarkable outcome (FR).
The CAGR is slightly lower than the SPY & quality Micro Caps strategy, but the Sharpe ratio is better. Conversely, the CAGR exceeds that of PP 2.0, with a logically lower Sharpe ratio since this involves only one asset class.
With just three ETFs, this approach delivers very solid results in both performance and risk management, while diversifying across three positions instead of one.
International diversification
Geographic diversification theoretically lets you benefit from global economic growth and reduce dependence on a single economy. But as noted in our previous article, reality is more nuanced.
Emerging markets and certain developed countries show disappointing long-term results, and it isn't purely cyclical. For emerging markets, Siegel showed there's a paradoxical negative correlation between GDP growth and stock returns, compounded by corruption, fraud, and anti-liberal policies. For some developed countries like France, it's often tied to excessive state intervention. Unsurprisingly, the most liberal economies tend to have the best-performing markets.
Currency risk
A doctor only prescribes a drug once certain its benefits outweigh its side effects. The same logic applies to investing: when managing one risk, you shouldn't create a bigger one. Savers who avoid the stock market out of fear of short-term risk are thereby guaranteed to lose money over the long run to inflation (FR).
Yet many investors handle currency risk the way an average saver handles equity risk: by avoiding it (FR). In doing so, they create a different problem. Concentrating on domestic stocks hurts diversification, with direct consequences for risk and performance.
A country can go through events that hit it harder than others. The second half of 2024 is a striking example for Switzerland, hit hard by the collapse in Chinese demand for watches.
There's an even more insidious danger for those who show a home bias: structural underperformance. A country can post mediocre returns for years, even decades. A French or Belgian investor limited to domestic stocks was significantly worse off than compatriots who diversified globally.
From March 1996 to December 2024, national indices grew as follows (Total Return in CHF):
- USA: 1,032%
- Canada: 601%
- Sweden: 517%
- Australia: 488%
- Spain: 400%
- Switzerland: 397%
- France: 340%
- Netherlands: 338%
- Germany: 260%
- Belgium: 200%
- Austria: 196%
- Italy: 194%
Imagine the frustration of an Italian, Austrian, or Belgian investor who, fearing currency swings, never dared to put money abroad.
Over the short term, currency risk is real. Over a longer horizon, though, it's negligible for assets like stocks, real estate, or gold: they carry intrinsic value that offsets currency swings over the medium to long run (J. Siegel). This holds true even for Swiss investors: despite the franc's strength, it's riskier not to invest abroad than to do so.
Investing broadly in the global market
A simplistic global approach through a single ETF like VT isn't optimal, the results don't deliver, as detailed in our article on ETFs. Let's explore other setups to find the one with the best odds of success, using the US market as the reference frame.
Domestic market vs the US market
Let's compare a strictly national strategy (Switzerland, EWL) against the US market (SPY), still in CHF:
| 1996-2024 Backtest | CAGR | Sharpe |
|---|---|---|
| SPY | 8.81 | 0.47 |
| EWL | 5.74 | 0.32 |
Over 28 years, that's nearly 400% for the Swiss market versus over 1,000% for the US market. The gap is enormous, and the Sharpe ratio is higher for the US market too, meaning it performed even better at equal risk.
Domestic & international vs the US market
To address this, many investors combine domestic and international stocks. A 50/50 split is a classic. For the backtest, three setups:
- 75% domestic stocks / 25% international stocks
- 50% domestic stocks / 50% international stocks
- 25% domestic stocks / 75% international stocks
The portfolio is rebalanced once a year. Domestic stocks: EWL (MSCI Switzerland). International stocks: VT (Total World Stock), available since 2008. Benchmark: VTI.
Whatever the allocation chosen, the results are fairly disappointing:
| 2008-2024 Backtest | CAGR | Sharpe |
|---|---|---|
| VTI | 10.84 | 0.68 |
| EWL (75%) + VT (25%) | 6 | 0.46 |
| EWL (50%) + VT (50%) | 6.33 | 0.48 |
| EWL (25%) + VT (75%) | 6.66 | 0.48 |
Two underperforming ETFs don't become better by combining them. VT is dragged down by emerging markets and certain developed countries. The Sharpe ratio stays well below the US market's, regardless of the allocation.
US & domestic vs the global market
Why not pair the domestic market directly with the US market instead of the global market?
| 2008-2024 Backtest | CAGR | Sharpe |
|---|---|---|
| VT | 6.92 | 0.47 |
| EWL (75%) + VTI (25%) | 6.97 | 0.54 |
| EWL (50%) + VTI (50%) | 8.3 | 0.61 |
| EWL (25%) + VTI (75%) | 9.59 | 0.66 |
| VTI 100% | 10.84 | 0.68 |
The findings: results are notably better with VTI than with VT, both in CAGR and Sharpe ratio. But adding EWL to VTI improves neither CAGR nor Sharpe ratio, even in small doses, which is surprising given how defensive Swiss stocks are considered to be.
Should you then focus solely on the US? Not necessarily. "Past performance is no guarantee of future results," and cyclical events can weaken any country. Diversification still matters.
The problem with non-US national indices lies in their small number of constituents. MSCI Switzerland (EWL) holds around forty stocks, and the top ten make up two-thirds of the index. Nestlé and Novartis alone account for a quarter. Diversification is therefore suboptimal.
We saw a similar situation with Micro Caps: ETFs failed to replicate their excess returns, but directly selecting stocks solved the problem. Let's apply the same principle to Swiss stocks.
For selecting Swiss stocks, I applied quality filters (margin, asset turnover, interest coverage, Piotroski F-Score) to MSCI Switzerland constituents (FR). I kept the top five, equally weighted, making up 25% of the portfolio, with the rest allocated to the US market via VTI.
The results for international diversification are far more compelling this time:
| 2008-2024 Backtest | CAGR | Sharpe |
|---|---|---|
| VTI | 10.84 | 0.68 |
| Quality Big & Mid Cap CH (25%) + VTI (75%) | 12.87 | 0.74 |
CAGR moves well ahead of VTI alone, with a much better Sharpe ratio. As with Micro Caps, direct stock selection pays off.
Market cap, sectors, and countries
Let's sum up what we've learned:
- By market cap, the best US-market portfolio is 50% SPY and 50% quality Micro Caps.
- By sector, the best US-market portfolio is equal parts QQQ, VDC, and XLV.
- By country, the best portfolio is 75% VTI and 25% quality Swiss Big & Mid Caps.
Putting all of this together, we get the following portfolio:
- 75% US market
- 37.5% Big Caps: 12.5% QQQ + 12.5% VDC + 12.5% XLV
- 37.5% quality Micro Caps
- 25% quality Swiss Big & Mid Caps
The 2008-2024 backtest, with VTI, SPY, and VT as references, delivers very strong results:
| 2008-2024 Backtest | CAGR | Sharpe |
|---|---|---|
| SPY | 10.94 | 0.7 |
| VTI | 10.84 | 0.68 |
| VT | 6.92 | 0.47 |
| Portfolio | 13.11 | 0.86 |
All three benchmarks are beaten, in both CAGR and Sharpe ratio. This portfolio is harder to implement given the direct stock selection involved. An investor who prefers simplicity can stick with the sector approach (QQQ + VDC + XLV), which also delivers excellent results.
Best strategies recap
Here are the three levels of approach, from simplest to most complete:
| Level | Allocation | Main advantage |
|---|---|---|
| Beginner | 33% QQQ + 33% VDC + 33% XLV | Simple, 3 ETFs, high Sharpe ratio |
| Intermediate | 50% SPY + 50% quality Micro Caps | Better CAGR, market-cap bias corrected |
| Advanced | 75% US (QQQ+VDC+XLV+Micro Caps) + 25% quality CH Big & Mid Caps | Maximum CAGR and Sharpe, international diversification |
Annual rebalancing in all cases.
Conclusion
A portfolio made up entirely of stocks can be diversified and relatively low-risk for this asset class, provided you play with market cap, sector, and geography. A sector strategy built on a few lowly correlated ETFs delivers solid, above-market results while staying easy to implement. If you're willing to select individual stocks, the numbers are very compelling in both return and risk management.
These strategies are very profitable over the long run, but they aren't right for every investor. Beginners, or those with low tolerance for volatility (FR), are better off starting with more conservative portfolios (FR), several of which we'll examine in upcoming backtests.
Frequently Asked Questions
Is a 100% equity portfolio too risky?
Over an investment horizon beyond 20 years, stock volatility drops below that of Treasury bonds, according to J. Siegel's research. Risk is concentrated mainly in short horizons (under 10 years) or during the decumulation phase.
Should you favor a global ETF like VT?
No. Backtests show VT underperforms the US market due to the weight of emerging markets and certain structurally weak developed countries. A targeted approach (SPY plus sectors or market caps) delivers better results, in both CAGR and Sharpe ratio.
Is currency risk a problem for Swiss investors?
Over the long run, no. Despite the CHF's strength, assets like stocks offset currency swings through their intrinsic value. Between 1996 and 2024, the US market generated +1,032% in CHF versus +397% for Switzerland. It's actually riskier not to diversify internationally.
What's the best 100% equity strategy for beginners?
The sector strategy (33% QQQ + 33% VDC + 33% XLV) offers the best trade-off: simple to implement with just 3 ETFs, annual rebalancing, and a Sharpe ratio above the market. No direct stock selection required.
How do you handle withdrawals from a 100% equity portfolio once financially independent?
This is the key question for investors who've reached financial independence. The 4% rule is often cited as a starting point, but it has significant limits: a fixed rate, insensitive to actual market conditions and the investor's age. The approach favored on this blog is the VPW method (Variable Percentage Withdrawal (FR)): the withdrawal rate adjusts each year based on age, portfolio allocation, and actual results, which considerably reduces sequence-of-returns risk while preserving capital for longer.
Sources and data
- Siegel, J. (2014). Stocks for the Long Run. McGraw-Hill, historical returns compared by asset class, GDP/stock-return correlation, long-term currency risk.
- PortfolioVisualizer.com, ETF backtests (VTI, SPY, VT, EWL, QQQ, VDC, XLV, IWR, IJR, IWC), CAGR and Sharpe ratios 2004-2024 and 2008-2024.
- Vanguard, VT data (Total World Stock ETF), history since 2008.
- Country performance data (Total Return CHF, March 1996 to December 2024): FactSet.
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