Investing, Money

Choosing Your Stocks: Why Low Returns Could Be Better For You

The stock market is famous for being a volatile beast, making investing in it difficult. However, it’s also known for being a great place to invest funds, which makes it even more difficult.

A stock market is a complex place, but one thing it doesn’t have is a simple formula for success. Instead, it’s a hodge-podge of theories, trends, and statistics that give us a range of predictions for the stock market’s future, all of which are only as good as the data that backs them up. How can you decide which forecast is right for you?

Choosing your stocks can be a time-consuming process, but it is one of the most fun and rewarding investments you can make. However, before you choose a stock, you need to know how it works and what it’s about. Here’s what you need to know about stocks and why they’re so important.

Stocks are designed to make money for investors, but returns have been modest at best over the last half-century. From 1926 through 2014, stocks generated about 1% annual returns, which means you should be happy to see anything less than 1% annual returns. So maybe the stock market isn’t as good as you thought it was.

If you are looking for a globally diversified portfolio of stocks, the chances are that you are looking for a combination of large-cap stocks, mid-cap stocks, and small-cap stocks. The idea is that these stocks will all be different in terms of their fundamental characteristics but that they will all perform well in different markets. While this strategy has its merits, it also has some issues. The main one is that it is hard to invest in sufficiently large numbers of stocks to achieve diversification.

We all know that dividends are like free money, right? No one to pay you, no massive investment to think about, and you’ll get that money regardless of what happens to the stock. And yet, low stock returns could be better for you than high returns. Why? Because stock prices can go up and down, and sometimes for no good reason.

With the stock market back in the black, it’s easy to become complacent about investing. No one wants to see their money shrink. We’re all taught to seek out the highest dividend yield, but is it the right move? There are times when lower yields are better for your portfolio. A lack of growth in the stock market is not necessarily a bad thing. If you are a long-term investor, there is good reason to expect lower returns—but only if you make some key tradeoffs.

Stocks have been an underappreciated asset class for decades, but they are finally getting more respect. One of the biggest reasons is the recent decline in interest rates (i.e. the Fed is doing more of what you want the Fed to do). Lower rates make stocks more attractive since they are riskier than fixed-income instruments (higher yields). The other reason for positive stock returns is the improved economy—markets like higher growth. Lately, however, some stocks (and commodities) have seen their share prices decline after good earnings news, while others have had disappointing earnings reports that forced investors to sell.

You’ve heard it a thousand times: stocks do best when they’re low. That’s the case for nearly every asset class: bonds, real estate, commodities, and so on. But some people can’t get over the fact that stocks, particularly the stock market, don’t always perform well.

To optimize your returns from your investments, you have to know what the market is doing. When buying a stock, it’s a good idea to compare the risks and rewards of low-risk investments with those of high-risk investments that have a history of delivering high returns.  For some stocks, this means going through a long series of price fluctuations, while for others, a manic swing to a new high or low may be the only way to get a great return. To get a handle on what to do, you have to understand what’s going on in the market.

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