A fundamental principle of investing is the risk-return tradeoff. When you accept more risk, you should expect higher rewards. But is this always true? In this episode of Buckingham Perspectives, Chief Investment Officer Kevin Grogan explains how this concept can help guide your investing decisions.
A fundamental principle of investing is the risk-return tradeoff. When you accept more risk, you should expect higher rewards. But is this always true? And how should it guide your investing decisions?
Most investors understand that risk and return are related. Take bonds and stocks, for example. While bonds typically offer lower returns than stocks, they are considered safer investments. When investors take on more risk, they should expect to be compensated for that additional risk. However, sometimes investors might be taking on unnecessary risk without extra compensation. Investing in a single stock is a good example. That’s because a single stock has the same expected return as the overall market, but it’s riskier than investing in a diversified portfolio of stocks. Research by Dimensional shows that over a 20-year period only about 20% of stocks outperform the market. If you have questions about the relationship between risk and expected return and the implications for your portfolio, speak to your wealth advisor. If you have any questions, please drop us a note.
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