Investment advice: Understand the risk/return relationship

In investing, risk and return are related.  Risk is the possibility of suffering harm or loss. Some things have little risk, e.g. Treasury bonds. But their return is relatively limited. To induce investors in riskier investments, higher returns must be offered.

He has a table of investment type, historic average annual returns (for the period 1926-2002) and range of annual returns (volatility).

  • Cash (including Treasury Bonds) returns on average 3-4%/year with a range of +1% to 9% annually.
  • Long-term corporate bonds return on average 6%/year but can range from -5% to +15% annually.
  • Common stocks return on average 10%/year but can range from -27% to +52% annually.

While the stock market tends to rise most of the time, he reviews the history of bear (declining) markets. Such declining periods can go on for several years. But eventually, the market comes back and recovers these losses and begins to gain once again. So the market is a good place for long-term investments but can be a poor choice for short-term investments.

Next time: Rule One: Start Saving now, Not Later: Time is Money.

The above is from my on-going study on investing, from Malkiel’s  The Random Walk Guide on Investing.For more, see the index page to my full summary.

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