By Jeff Sommer, December 8, 2023
“All investments involve taking on risk.” That’s a standard Securities and Exchange Commission warning.
Be careful. But be aware that unless you take on some risk, you won’t get much of a return. This risk-return trade-off is an essential part of investing, even if you have a low threshold for risk.
Perhaps you can’t afford to lose money, don’t have enough time to recover from a temporary loss or just can’t stand the very idea of putting your money at risk.
If any of this sounds like you, there is some good news. Interest rates are far higher than they were just a couple of years ago, though they have fallen a bit lately. For risk-averse investors, the terms of the classic trade-off have shifted in your favor. Without taking on more short-term risk, you can get better returns.
Still, fixed-income investments aren’t a panacea. Over the long run, they have returned less than the overall stock market and are likely to do so in the future. Paradoxically, if you overemphasize safety by loading up too heavily on fixed income, you may be giving up a degree of prosperity later. Balancing these issues is what the risk-return trade-off is all about.
To continue reading, view the full article on the New York Times website here: https://www.nytimes.com/2023/12/08/business/interest-rates-stocks-bonds-retire.html
