There is always risk in the stock and bond markets. Risk is the source of returns. The greater the risk, the higher the expected return. Here’s an example:
We all know there is a risk that Greece, Italy and Spain may default on their sovereign debt. As that risk level increases, buyers of that debt demand a higher rate of return to compensate them for that risk.
The current price of publicly traded stocks and bonds represents the collective judgment of tens of millions of buyers and sellers, trading about ten billion shares a day. Their judgment is what places a value (the “price”) on these shares. It takes into account all levels of economic uncertainty.
When you hear financial pundits discuss economic uncertainty and recommend buying or selling certain assets, you should reject their advice. Whatever facts they are relying on have already been priced into the asset they are recommending you buy or sell. That asset is fairly priced. Trying to find a misplaced asset flies in the face of this basic reality.
There will continue to be financial ‘experts’ who claim they will earn you greater return for little or no risk. They supply evidence which is unsupported and of no value. There is no substitute for a prudent strategy and discipline.
Please comment or call to discuss how this affects you and your long term financial goals.
- Where can investors find shelter from the volatility storm? (telegraph.co.uk)
- A head for money (theage.com.au)
- Invest in stocks? Small players still smarting (usatoday.com)