The Risk Of Stock Investing
There are many misconceptions in stock investing. The very first one is that stocks are risky (we even classify stocks as a risky asset class). Many investors, even the experienced ones, believe that you have to have good skills to invest in stocks. On the other hand, some people believe that if Warren Buffett can beat the market and deliver outstanding returns, so can they, or at least some other professional investors like good fund managers. In this newsletter, we will try to clarify some of these issues.
The definition of risk
We are often confused with the notion of risk. First, virtually everyone agrees that stocks are risky. But what exactly does this mean?
A commonly accepted definition for risk is the volatility of daily returns, or daily return standard deviation. For example, since 2000, the S&P 500 index fund VFINX has an average daily standard deviation 19%, compared with 5% of total bond index fund VBMFX.
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