Frequently Asked Questions
Question: Is there such a thing as a "free lunch" in investing?
Answer:
Investment theory and historical capital market return data suggest that, over long periods of time, there is a relationship between the level of investment risk and portfolio return. In general, in order to attain higher returns one must accept higher risk (i.e. volatility of return). Consider the following two asset classes: (a) Money market funds have a very low risk and pay rates of return consistent with ultra short bonds that are often only slightly more generous than bank savings accounts. (b) Emerging market stocks will sometimes provide eye-popping returns, albeit with very high risk. An investor knows what one is going to get with money market funds (predictable means low risk). The year-to-year returns, however, of emerging markets stocks are highly unpredictable and often result in wild swings (unpredictable means high risk). As with most of life’s circumstances, the same holds true with investing – you are hard pressed to locate a free lunch.
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