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The stock market historically has performed very strongly
outperforming all other forms of investments. Between the time
period of 1926-2004, there was a 10.4% annual gain in the
stock market followed by bonds at 5.4%. Investing in the stock
market however is a risky business. In 1987, one of the worst
days was experienced when the stock market dropped by 22.6%.
Stocks tend to return more then bonds, therefore are more
risky. Earnings is one of the biggest factors that determine
where the stock price will go. Over a period of time, stocks
may fluctuate based on factors such as interest rates, however
in the long run, earnings is what it all comes down to.
As far as bonds are concerned, when interest rates go higher,
bond prices fall. The main reason for this is due to the fact
that individuals who buy bonds will not have to pay as much
for existing bonds that have a fixed interest rate of 5%, as
they will have to for a new one which is paying (like 6% or
higher).
So what is the biggest threat to your investment? Inflation.
The stock market may result in a loss in your portfolio
however the market has always bounced back up in the past,
eventually leading to new highs. Inflation however, based on
the history stripped 3.2% annually off your money value, and
only rarely giving you back what it takes away from you.
Therefore it is very important to put away your retirement
investments in a position that will result in the highest long
term results.
You must also know that keeping a diverse portfolio holds a
lot less risk as opposed to a portfolio which is concentrated
on one or only a couple investments. Spread your money among
different investment types, and you will reduce your risk
losses and have a better chance to outperform the market.
Source: http://money.cnn.com/ |
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