Two cents’ worth: When embracing risk, volatility can pay well on the stock market

An article from Sunday Times 14 Oct 2007.

Some major ideas as follows:

• For long-term financial planning, one point to note is that, on average, over long periods of time, shares have outperformed cash and fixed interest investments by 5 percent to 7 per cent annually.

• While no one can predict the future, this basic relationship should continue to hold true for the next century, barring extreme events. The return above cash rate from shares is called the equity risk premium.

• The difference between success and failure is not how investment markets behave – we know generally they generally do well over the long term – but how investors behave.

• Research suggests that investors detest the way a loss makes them feel even more than they fear the loss itself. It appears the emotional distress they suffer can be detrimental as the financial loss itself. Taking investment risks involves accepting the possibility of making a loss and suffering regret when that happens. Risk-averse investors might avoid loss, but in doing so, they also lose the possibility of making significant gains.

• The time horizon is always an important factor to consider when making investment decisions.