The Right Risks
Interest rates are at historic
lows and this presents challenges for investors.
Recently, money market accounts yielded an average of 0.18 percent. At that rate it takes 450 years – five centuries – to double your money. After the recent financial crisis,
investors are justifiably scared. In their search for guarantees and desire to
avoid risk, many investors actually seek out
higher returns and end up taking on greater risks that they don’t understand. Higher yields come in only two ways – credit risk (the risk that you won’t
get repaid) and duration risk
(lending money for a longer time). Both risks have their place as long as you understand the risks and take
them as part of a balanced approach. It’s the
same with stocks. We know that the stock market can crash and sometimes individual stocks never recover. But over
time, the broad market has done well. On average for the last century, the stock market has returned 10 percent
a year and doubles in seven years.
That average rarely happens in the short run but in the long run, it has
historically worked. Having a well constructed portfolio means taking
the right risks – not pretending that
you don’t take any.