Risk, Return, and Time

You might be wondering why bonds are not more popular, since they almost guarantee a return.  A bond is a type of fixed income asset, which carries with it a certain type of risk.  Because factors such as inflation are so uncertain, it is always a possibility that a bond can under-perform when compared to the rate of inflation, thus bringing with it a net loss of money.  This necessarily implies that if you wish to outperform the rate of inflation, you must diversify your portfolio with stocks.

Stocks, over the short term, are much riskier than bonds.  If you look at the market data for the past 200 years, however, you will notice that on average, over 5-year periods, the worst stock market averages have only slightly under-performed the worst bonds.  Over 10-year periods, the worst stock market averages have outperformed the worst bonds.  Over 20-year periods, the stock market has never been under the rate of inflation.  Bonds and bills, however, once fell over 3 percent behind inflation.  This is where the risk of bonds is realized.  Over the long run of 10 years or more, stocks are necessary for building wealth.

In our world of almost instant gratification, a quick return on our money is desired.  But when it comes to investing, this is just not the case for the vast majority.  True, there are some out there who get lucky when an investment hits big (think Google), but for the rest of us, this doesn’t happen.  Think about it like this: we work our entire lives to support ourselves.  This, more or less, is enough to cover expenses while we are working.  What happens when we stop working?  This is where long-term investment comes into play.  Data shows that the longer we hold any stock shares, and thus the earlier in our lives that we begin investing, the more money we will have when it comes time for retirement.  Risk of return drops from 18% for a stock holding of 1 year, to less than 2% with a holding of 30 years, according to Jeremy J. Siegel.

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