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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 is small and Microbuisenes
tadesse Reply
what is model
Daniel Reply
The wealth of Nations
Yusuf Reply
the wealth of nations, is it the first?
Umar
Yes very sure it was released in 1759
Yusuf
thank you Yusuf.
Umar
then when did he died?
Umar
17 July 1790 Born: 16 June 1723, Kirkcaldy, United Kingdom Place of death: Panmure House, Edinburgh, United Kingdom
Yusuf
1790
Yusuf
that's my today questions, thank you Yusuf it's bed time see u after.
Umar
what is fiscal policy
kemigisha Reply
what's mode?
Umar Reply
mode is the highest occurring frequency in a distribution
Bola
mode is the most commonly occurring item in a set of data.
Umar
Please, what is the difference between monopoly and monopsony?
Olaleye Reply
is there monopsony word?
Umar
I have no idea though
Umar
please, in which year Adam smith was born?
Umar
monopsony is when there's only one buyer while monopoly is when there's only one producer.
Bola
who have idea on Banter
Ibrahim
like trade by barter?
Bola
Monopoly is when there's excessively one seller and there is no entry in the market while monopsony is when there is one buyer
kemigisha
Adam smith was born in 1723
Bola
 (uncountable) Good humoured, playful, typically spontaneous conversation. verb (intransitive) To engage in banter or playful conversation. (intransitive) To play or do something amusing. (transitive) To tease mildly.
Umar
which book Adam smith published first? the first book of Adam smith pls.
Umar
what is market power and how can it affect an economy?
Gab Reply
market power:- where a firm is said to be a price setter.market power benefits the powerful at the expense of others.
Umar
Market power refers to the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition is referred to as market or monopoly power. The exercise of market power leads to reduced output and loss of economic welfare
Kartheek
find information about the national budget
Molahlegi
three branches of economics in which tourism is likely to figure
Makgotso Reply
What are those three branches?
IlRegno
explain why Nigeria adopted labour intensive techniques to capital intensive techniques
Terdoo Reply
meaning of monopolystic competetion?
Jethail Reply
can I join the group
Nonso
yes.
Nurudeen
what is economic integration
Mohamed Reply
why does it makes sense to let the sewage disposal company in your town have a monopoly?
Janice Reply
how might a monopoly affect price?
Janice
how might a monopoly affect prices?
Janice
The principle of Economic is one to be involved in any economic buying substance
Anastassiya Reply
reason of corporation
Mohamed
What is economic integration
Mohamed
what are the principle of economics?
oche Reply
What is (Qs)
Bigi Reply
What is (Qs) and (Qd)
Bigi
Quantity of supply and Quantity of demand
Dilshoda
Qs: Is quantity of supply and Qd: quantity of demand
Cabdikariim
give as me quantitys
ahmed
among all the definition of economics which of the definition is generally acceptable?
oche
i science that studies human behavior as a relationship between ends and scarcity that have alternative uses
ousman
okay......
oche
what are the principle of economics?
oche
what is small and micro busenese
tadesse
why small buiseness ineconomic development
tadesse
how to start a small busines
tadesse
what are the source for business ideas?
tadesse
what is franchising?
tadesse
what are the diffirent forms of business organization?
tadesse

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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