Analyzing The Risk Of Stocks After The 6.9% Drop
The stock market snapped a six-day losing streak on Friday, with the Standard & Poor's 500 closing at 2767.13.
Price volatility is a key way of measuring the risk of owning stocks, especially since the most volatile days are losing days. While one-day spikes are frightening losses, the 30-day average price moves along much more smoothly. Trouble is, when you are in the middle of a red-line period, it's hard to focus on the black line. It's often hard to believe that prices historically smooth over, over longer periods and there is a good chance of that happening again.
In fact, this is why investors get paid a premium for the risk of owning stocks versus other less volatile alternatives. Over the decades, stocks historically returned about 10% annually. Nothing ever is guaranteed in investing but that's about 6% more annually than the return on a 30-day U.S. Treasury-backed fixed income investment. That equity risk premium was awarded to investors for putting up with the volatility of stocks.
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