Our mission here is to try to provide some clarification on just one topic related to individual equities - namely the question of risk.
For investors who have the appropriate time horizon (5 years at a minimum) our opinion is that stocks may be one of the least risky investments. Let's consider the two important long-term risks for investors:
• Inflation - Owning stocks has been a time-proven method of combating inflation.
• Longevity - Earlier generations could usually count on pensions. Today's retirees and future-retirees will almost certainly have to self-fund their retirements using IRAs, 401ks etc. Funding 30 - 40 year retirements will take careful planning and equities will surely be part of the equation.
Although we are not advocating stocks as the sole answer to these challenges, equities have some unique attractions which long-term investors should consider.
Experienced investors acknowledge the potential for individual stocks to be highly volatile compared to bonds and other investments with more predictable cash flows. Even a conservative portfolio of equities may drop 10% or more in a single day given sufficiently disruptive news (think 9/11). Yet, this kind of volatility can be a friend to those who can take the longer view.
Are stocks for you? Equities must pass your personal "sleep test". If you agonize because one of your favorite companies announces slightly sub-par quarterly profits and promptly falls by 15%, then individual stocks have more risk than you can assume.
However, if you are willing to stay the course through the peaks and valleys of the market, equities have outperformed over the long run against bonds, C/Ds and other types of fixed income investments. Equities should be a part of the asset allocation of most long term, growth oriented investors.