Capital markets have a rule that is based on common sense. Stocks always outperform bonds and bonds always outperform money market investments over longer time periods. If these relationships did not exist you would not buy stocks or bonds. You would invest all of your assets in money market funds.
Unfortunately, these capital market relationships do not apply all of the time. There are periods when bonds outperform stocks and money market funds outperform bonds. And, the future performance of the three major asset classes are impossible to predict. You have to trust that this capital market theory will work over longer time periods. Then you have to be patient.
Stock prices are a function of meeting the expectations of Wall Street analysts and investors. Prices go up when stocks meet expectations. Prices go down when stocks do not meet expectations. The higher the expectations, the higher the price/earning ratio, the higher the volatility of individual stocks.
Lower Risk Strategy
There are lower risk strategies when you invest in stocks:
- You invest in mature companies that pay dividends
- You invest in utility and food stocks
- You limit your exposure to common stocks to less than 50% of your assets
Higher Risk Strategy
A high risk investment strategy can have the following characteristics:
- You invest in small company growth stocks
- You invest in companies in emerging markets
- You invest more than 50% of your assets in common stocks
You have to invest in stocks to achieve higher investment returns. Your exposure to stocks should be based on your willingness to take losses to achieve the higher returns. You will not achieve higher returns every year and some years your returns will be negative numbers. This is the volatility of the stock market.