Should People Consider Low Risk High Return Investments?

As far as equities are concerned, they are traditionally considered to be better performing over the long term than corporate bonds because of the higher risk they represent. The more unstable a company is, the greater the doubts about its ability to repay its bonds or earnings (shares). This, in turn, means the price of the bonds it issues is lowered along with its share price. Indeed, the historical analysis of US equity returns (and this analysis is worth much for other developed economies) shows a real annual return, that is, inflation is adjusted between 6.5% and 7%, which is considerably higher than the yield on long-term government bonds (1.7%). The difference of 4.9 points is the risk premium. You can view this here.

If folks compare the annual yield of equities and bonds to the nineteenth and twentieth centuries, there is a greater discrepancy between the best and the worst yields of equities than between the best and the worst performance of bonds. This would confirm that equities are both more remunerative and riskier than bonds. Various studies have sought to prove that, in the long run, stocks are no less risky than bonds, although they offer a much better return.

The principle is this: the good years would make up for the bad ones. In the long term, stocks would not be riskier than bonds and could be suitable even for the most cautious investors. The best return on equities could still be explained by the risk of total market collapse, except that, out of all the disasters that have been analyzed, bonds have shown lower returns than equities. Keeping that in mind, in the long run, stocks are definitely not riskier, but they have better returns. But there is still a need to protect against poor performance in the short term. The best way is to have a diversified portfolio. This will lower the level of risk and probably also the expected average yield. Several studies have shown that the probability of making profits increases with the duration of investment and that the lengthening of the duration of placement makes it possible to reduce the risks and loss, even if this lengthening can also reduce the chances of a particularly high maximum gain.