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Stock Vs. Bonds - Essay Example

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The author of the essay "Stock versus Bonds" states that the stocks have historically had much higher returns than bonds and identifies can these excess returns be justified by the higher risk attached to stocks, or are there alternative explanations  …
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Stock Vs. Bonds
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Stock Vs. Bonds

Download file to see previous pages... However, before delving further into this economic argument it is best to, first of all, understand the definition and composition entailed in the term ‘risk.’ This is because there has been a general misconception and understanding of the term ‘risk’ more so among long-term investors. In this regard, much of the literature regarding the term ‘risk’ is misconstrued and totally misleading to long-term investors. This is somewhat due to the over-reliance and stressing on ‘short-term volatility’ (Nicholson, & Snyder, 2009).
According to the definition generally accepted by the investment community and long-term investors, the risk is regarded as the volatility return accrued from an investment in the short term of daily, annual or monthly. Evidently, the measurement of the volatility of returns is either by standard deviation or variance. From this perspective, the definition offered is flawed in relation to a long-term investor for two reasons. Foremost, the conclusions and analysis drawn are reliant on nominal returns while blatantly paying no attention to the erosion of purchasing power instigated by inflation (Nicholson, & Snyder, 2009). In the case of investors in the short term, inflation is not a significant concern but of high impact during the long-term. The second flaw is that the conclusions and analysis drew more than often place an emphasis on the volatility of daily, monthly or annual returns. In the case of many investors, a focus that is based annually maybe more appropriate. However, for long-term investors, their concerns should me mostly focused on risks consistent with their long-term wealth parameters and not basically focused on the short-term pitfall along the way (Nicholson, & Snyder, 2009).
Evidently, stocks provide higher return potential when compared to bonds. However, they accrue a greater volatility in the process. The major questions arising from this percent are; why do stocks produce more returns when compared to bonds? ...Download file to see next pagesRead More
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