<< Chapter < Page Chapter >> Page >
Annual returns on s&P 500 stocks, 1950–2012
Period Total Annual Return Capital Gains Dividends
1950–1959 19.25% 13.58% 4.99%
1960–1969 7.78% 4.39% 3.25%
1970–1979 5.88% 1.60% 4.20%
1980–1989 17.55% 12.59% 4.40%
1990–1999 18.21% 15.31% 2.51%
2000–2009 −1.00% −2.70% 1.70%
2010 15.06% 13.22% 1.84%
2011 2.11% 0.04% 2.07%
2012 16.00% 13.87% 2.13%

The overall pattern is that stocks as a group have provided a high rate of return over extended periods of time, but this return comes with risks. The market value of individual companies can rise and fall substantially, both over short time periods and over the long run. During extended periods of time like the 1970s or the first decade of the 2000s, the overall return on the stock market can be quite modest. The stock market can sometimes fall sharply, as it did in 2008.

The bottom line on investing in stocks is that the rate of return over time will be high, but the risks are also high, especially in the short run; liquidity is also high since stock in publicly held companies can be readily sold for spendable money.

Mutual funds

Buying stocks or bonds issued by a single company is always somewhat risky. An individual firm may find itself buffeted by unfavorable supply and demand conditions or hurt by unlucky or unwise managerial decisions. Thus, a standard recommendation from financial investors is diversification    , which means buying stocks or bonds from a wide range of companies. A saver who diversifies is following the old proverb: “Don’t put all your eggs in one basket.” In any broad group of companies, some firms will do better than expected and some will do worse—but the extremes have a tendency to cancel out extreme increases and decreases in value.

Purchasing a diversified group of the stocks or bonds has gotten easier in the Internet age, but it remains something of a task. To simplify the process, companies offer mutual funds    , which are organizations that buy a range of stocks or bonds from different companies. The financial investor buys shares of the mutual fund, and then receives a return based on how the fund as a whole performs. In 2012, according to the Investment Company Factbook, about 44% of U.S. households had a financial investment in a mutual fund—including many people who have their retirement savings or pension money invested in this way.

Mutual funds can be focused in certain areas: one mutual fund might invest only in stocks of companies based in Indonesia, or only in bonds issued by large manufacturing companies, or only in stock of biotechnology companies. At the other end of the spectrum, a mutual fund might be quite broad; at the extreme, some mutual funds own a tiny share of every firm in the stock market, and thus the value of the mutual fund will fluctuate with the average of the overall stock market. A mutual fund that seeks only to mimic the overall performance of the market is called an index fund    .

Diversification can offset some of the risks of individual stocks rising or falling. Even investors who buy an indexed mutual fund designed to mimic some measure of the broad stock market, like the Standard&Poor’s 500, had better buckle their seatbelts against some ups and downs, like those the stock market experienced in the first decade of the 2000s. In 2008 average U.S. stock funds declined 38%, reducing the wealth of individuals and households. This steep drop in value hit hardest those who were close to retirement and were counting on their stock funds to supplement retirement income.

Questions & Answers

what are the principle of economics?
oche Reply
What is (Qs)
Bigi Reply
What is (Qs) and (Qd)
Quantity of supply and Quantity of demand
Qs: Is quantity of supply and Qd: quantity of demand
give as me quantitys
what Make things scarce
Soudani Reply
why do we studied economic
for the stability and growth of any reign.
what is macro economics.?
which part of economics is interesting..
how does economics define me
clement Reply
what are the factors that determines the demand and supply
what are the importance of Economics
Betty Reply
tell me something very important about economics..
Fayaz Reply
how may I solve arithmetic mean ,,,all example
Cee Reply
what is agriculture
Itoe Reply
simple method of understanding cost concept
Oludare Reply
what is inflation
Christiana Reply
Inflation is a general increase in price levels
is the action of inflating something
inflation is the persistent increase in general price level of goods and services in an economy over a considerable period of time .
inflation is the general increase of a commodity in a particular period of time.
inflation is a general increase in price levels of commodities
what are the types of inflation?
inflation is the period of persistent rise in the general level of the price of goods services over time
we have creeping inflation, demand pull inflation ,cost push inflation, and galloping inflation .
I s Nigeria in any kind of in inflation? If yes which kind?
please can someone help me with the principles of economic?
How are you
and u
so to day what do u have
am fine
nothing bro
no discassion just question
how can a location of a firm create difference between producers
joy Reply
what is monetary policy
is a monetary from policy that's authorized of country encharces
What would you say about the the mobility of enterprise as a factor of production?
Cathryn Reply
how can I connect myself to this Ambrose platform
kanu Reply
I am good and you I am from sierra Leone and I am new her
kanu Reply
u are welcome bro, here is a good platform for you to be
That i know,thanks bro.
what the main definition of economic
Uhara Reply
the main definition is given by prof Lionel Robbins as a social science which studies human behavior between ends and scarce which have alternative uses
what covers macro economics.

Get the best Principles of economics course in your pocket!

Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?