Cordell & Cordell, P.C. - Louisville, Kentucky
10200 Forest Green Blvd, Suite 407
Louisville, Kentucky 40223
502.710.0050
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Financial Basics

Monday, 03 September 2007 13:00
Let’s start with a few basics. Have you ever seen the statistics on the long-term returns of various investments? Historically, stocks have returned more than bonds and bonds have returned more than cash (money markets, CDs, short-term treasuries). Which begs the question, why would a long-term investor own anything but stocks? The answer is volatility. 

Volatility, or fluctuation, is the price investors pay for the potentially higher returns offered by riskier investments. Many investors would like the higher returns generally offered by stocks but are unable, or unwilling, to deal with the ups and downs of the market. Some investors try to cope by trying to time the market. That is trying to get in and out at the right time.

 

Studies have shown that most investors who attempt market timing fail miserably. The reason is easy to understand. Many people trust their instincts to tell them when to be in or out of the market. Most of the time our instincts are wrong. Think about it. We want to invest more when the market is up and invest less when the market is down. The exact opposite of what we should probably be doing. For most investors, it is better to determine what risk (fluctuation) level they are comfortable with and invest in a portfolio designed to give the maximum return for that level of risk. How do you do that? We’ll discuss it next month.

 
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