Stock returns

Investors expect a fair return on investment. If one investment doesn’t offer
a high enough rate of return, investors can choose to move their money into
other investments that they believe will perform better. Instead of buying a
diversified basket of stocks and holding, some investors frequently buy and
sell, hoping to cash in on the latest hot investment. This tactic seldom works
in the long run.
Unfortunately, some of these investors use a rearview mirror when they purchase their stocks, chasing after investments that have recently performed
strongly on the assumption (and the hope) that those investments will
continue to earn strong returns. But chasing after the strongest performing
investments can be dangerous if you catch the stock at its peak, ready to
begin a downward spiral. You may have heard that the goal of investing is to
buy low and sell high. Chasing high-flying investments can lead you to buy
high, with the prospect of having to sell low if the stock runs out of steam.
Even though stocks as a whole have proved to be a good long-term investment, picking individual stocks is a risky endeavor.arket returns. In fact, in
the U.S. markets, data going back more than two centuries documents the fact
that stocks have been a terrific long-term investment. The long-term returns
from stocks that investors have enjoyed, and continue to enjoy, have been
remarkably constant from one generation to the next.
Going all the way back to 1802, the U.S. stock market has produced an annual
return of 8.3 percent, while inflation has grown at 1.4 percent per year. Thus,
after subtracting for inflation, stocks have appreciated about 6.9 percent
faster annually than the rate of inflation. The U.S. stock market returns have
consistently and substantially beaten the rate of inflation over the years
Stocks don’t exist only in the United States, of course . More
than a few U.S. investors seem to forget this fact, especially during the sizzling performance of the U.S. stock market during the late 1990s. As I discuss
in the earlier section “Diversify for a gentler ride,” one advantage of buying
and holding overseas stocks is that they don’t always move in tandem with
U.S. stocks. As a result, overseas stocks help diversify your portfolio.
In addition to enabling U.S. investors to diversify, investing overseas has
proved to be profitable. The investment banking firm Morgan Stanley tracks
the performance of stocks in both economically established countries and socalled emerging economies. As the name suggests, countries with emerging
economies (for example, Brazil, China, India, Malaysia, Mexico, Russia, South
Korea, and Taiwan) are “behind” economically but show high rates of growth
and progress.