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Q: Risk and Return ( Answered 4 out of 5 stars,   2 Comments )
Subject: Risk and Return
Category: Business and Money > Finance
Asked by: stressqueen-ga
List Price: $20.00
Posted: 04 Aug 2005 20:50 PDT
Expires: 03 Sep 2005 20:50 PDT
Question ID: 551915
My company recently wrote a positon article on our approach to
investing for the small investor, titled "Investing for the little
guy".  Potential clients have responded to the article that was posted
on our website.  I have to address some of the FAQ's that will be
eventually posted on a FAQ segment.  Some respondents have compared
investing in the stock market as a no win situation and only the
institutional investors can win.  They would like a response that
clarifies my firm's position ragarding risk in light of these beliefs.

In my response, I must address these questions building upon the risk
and return concepts.  What should I tell them?
Subject: Re: Risk and Return
Answered By: vercingatorix-ga on 02 Sep 2005 13:11 PDT
Rated:4 out of 5 stars
Here's how I would answer it:

Investing in the stock market is far from a "no-win" situation.

It is true that institutional investors have access to information
most individual investors cannot see, such as research reports,
historical company and market data, and in many cases direct
conversations with corporate executives. But those institutional
investors also face constraints that individual investors do not.
Mutual-fund managers must often sell stocks they would prefer to hold
simply because they need to raise cash to cover redemptions by
fund-holders. Other institutional investors are limited as to the kind
of investments they are allowed to choose, or face any one of a number
of additional constraints.

Individual investors should also take heart in the fact that the stock
market's overall trend is upward. Sure, the market has bad days, bad
months, and bad years. But every decline is eventually followed by an
increase. According to the Ibbotson Associates 2005 yearbook,
large-company stocks have generated an annualized return of more than
10% from 1926 to 2004. The market has fallen in a number of thos
years, but large-company stocks declined in only 10 of the 75
five-year periods from 1926 through 2004. Using 10-year periods,
investors would have made a tidy profit holding a portfolio of all
large-cap stocks from 1995 through 2004. The last time large-company
stocks declined over a 10-year period was the period from 1930 to
1939. Large-company stocks have never declined in value over a 15-year

Harness the power of time. If you buy a diversified investment, say,
an index fund that serves as a proxy for the "market," you're very
likely to make money if you simply hold that investment. If the S&P
500 Index rises 6% this year, you can earn a return close to that 6%
simply by buying an index fund. If you believe the market will rise
over the next 10 years, you can capture those gains by simply buying
"the market" and holding on tight.

There is plenty of money to be made in the stock market, even by
individual investors. Consider this: An investor who purchased a
quality S&P 500 Index fund 10 years ago has earned a compound annual
return of more than 9%. That's nothing to sneeze at.

Individual equities offer more risk and reward, and you certainly
can't just buy them and forget about them. Individual investors can
purchase such index funds any time they like. Alternatively,
individual investors can research and select their own stocks, or
employ experts who will do so on their behalf, in an effort to earn
returns that beat the market.

Please keep in mind that as an individual investor, you are not
"competing" with institutional investors. You are simply trying to
make some money. If your investments earn 10% for a given year and an
institutional investor makes 12%, what have you lost? Nothing.

Set a reasonable goal for yourself. "I want to match the market." "I
want to beat the market without taking on too much extra risk." "I
need a 6% annualized return over the next 15 years if I want to retire
at age 60." You're competing against your own return target, not
someone else's.

Stock investing, if done wisely, can be a "win-win" proposition. Picture this:

I buy XYZ Corp. for $10 per share at the end of 2002.
You buy XYZ Corp. from me for $11 per share at the end of 2003. 
Joe Schmoe buys XYZ Corp. from you for $12 per share at the end of 2004.
At the end of 2005, perhaps Mr. Schmoe can sell his shares for $13 apiece. 

Every party to the transaction has made a profit. And you don't have
to be an institutional investor to get in on that action.

Hope this helps,

stressqueen-ga rated this answer:4 out of 5 stars
Thank you!  This answer is outstanding.

Subject: Re: Risk and Return
From: daniel2d-ga on 04 Aug 2005 21:25 PDT
Respond to "beliefs" with facts and figures.
Subject: Re: Risk and Return
From: myoarin-ga on 05 Aug 2005 07:14 PDT
With all due respect, it would seem that the company should have the
knowhow to clarify its position.  A proposed answer from here might
not agree with the company's position.
The title of the article seems popular, used by the SF Fed. Reserve
Bank to someone suggesting timber investment.

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