Why oh Why Do I Invest in Stocks?

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This is why we invest in stocks. If government bonds seem "safe", then using "unsafe" large-cap stocks more than tripled the return after inflation. Using small-cap stocks caused the return to more than quadruple.

This makes a lot of sense. The returns from bonds are much more stable (reliable) than the returns from stocks. The market assigns returns based on an estimate of reliability. Bonds are more "reliable" therefore they must return less than the "unreliable" stocks.

To achieve their financial planning goals, most of my clients need returns that are greater than what can be provided by bonds or cash or CDs, etc. By mixing in an appropriate amount of stocks with the bonds, we hope to achieve the required return.

The disadvantage to using stocks is volatility and this can be very painful at times.

Right now we are in an extreme bear market that illustrated quite well that the pain of owning stocks is watching them go down, down, down. However, for most of my clients, cheaper stock prices are a good thing because they can buy more stocks at lower prices. For those nearer retirement, an adjustment to more bonds and less stocks may be an answer although the planning is complicated by spending patterns, Social Security, other sources of income, and perhaps the need to leave a bequest for the next generation.

Data Source: Morningstar 2008. Thanks to Nick Murray in his book Behavior Investment Counseling for the idea for this article.