Investing Truisms

  1. Over long periods, stocks will have greater total returns than bonds. There is ample evidence to demonstrate that, over time, stocks perform better than bonds. It is an economic principal that increased risk must offer increased return, or no one would willingly take the risk. The premium is the excess return (compared with the less risky alternative) that investors receive in return for accepting the risk. This premium has averaged roughly 8.0%, evidenced in Ibbotson's data for 1926 through 1999. This number can be used to rationally estimate expected returns, i.e., the risk premium added to the less risky alternative.
  2. Over long periods, bonds will have greater total return than money market investments. Numerous charts support the assertion that bond total returns are greater than money market returns. This can be violated when the yield curve is inverted, but under normal economic circumstances, the individual willing to lend his funds for long periods receives a premium for the risk taken.
  3. Over long periods, money market returns will slightly exceed inflation. This is important to realize if your only goal is to keep pace with inflation. This would be the case if you have more than adequate money to live the life you want. Most individuals do not, which is why they must be willing to take on some risk.
  4. On average, stocks are much more volatile than bonds. Ibbotson's data for 1926 through 1999 suggest that in any given year there is roughly a 30% chance that the broad-based stock market will be down rather than up.
  5. On average, bonds are more volatile than money markets. When the prices go down, you may feel that you can hold on until the bond matures, but the reality is that bond total returns are negative almost as frequently as stock returns. They do not lose the same value as stocks, however. Since the value of a bond is the sum total of all of its future coupons and maturity value, discounted by some interest factor then adjusted for the potential of default, it is obvious why bonds would frequently decline when stocks decline.
  6. Money markets are, for the most part, safe. Using money markets in a portfolio is a way to reduce the volatility of the overall portfolio value.
  7. Sooner or later, you will make investments that go down immediately after you buy.
  8. You will sell investments that continue to go up after you are out. It is virtually impossible to pick a top. It is good advice to not watch a stock after you have sold it.
  9. You will stay in some holdings too long. This is similar to not knowing exactly when to sell. If things go well, you will find and buy investments that go up. You will almost inevitably own something that will reach a price peak, decline, and then you will decide to sell. Unfortunately, some investors will view selling a security below its high as lost money, even if they purchased it at a much lower price.
  10. The value of the opportunities you miss will far exceed those you take. For example, if investors had only invested in Microsoft when it first went public, before it became the large company it is today, then they would all be rich. The investment that they passed on has almost always made much more than the one they are in.
  11. Someone, or some group of people, will always do better than you. This is easy to understand. Anyone who researches past performance can find an index, mutual fund, or individual investment that did better than what they owned.