Stock returns are never fully guaranteed and always include potential loss.
Between 2001 and 2010, stocks in the S&P 500 earned investors a little more than 1 percent per year. Considering that bonds earned investors more than 5 percent per year during this same period, you may wish to explore alternatives to investing in the country's largest companies that make up the S&P 500 index.
Risk and Reward
Generally, the higher returns a stock or other investment pays, the riskier it is. For example, the lottery is a type of investment that pays an extremely high rate of return, but the risks of loss are phenomenal. Investing in stocks is usually safer than investing money in lottery tickets, but keep in mind that buying stocks that offer higher potential returns also offer higher potential financial loss.
Size Matters
According to a Duke University study, large company stocks, such as those represented by the S&P 500 index, have averaged more than 11 percent gains per year since 1925. Over that same period, smaller companies that reinvest their earnings instead of paying dividends, such as those represented by the Russell 2000 index, have averaged over 16 percent per year over that same period.
International Markets
Duke University also looked at data from international markets between 1970 and 1995. During this time, most foreign market stocks outperformed U.S. company stocks, including smaller sized companies. The Latin American market performed best during this era, earning more than double the returns U.S. stocks offered. At the time of publication, international stocks continued performing well, but there is no guarantee they will always outperform domestic company stocks.
Leveraged ETFs
An exchange-traded fund (ETF) is a type of investment that is designed to perform on par with a stock index it represents. For example, the ETF with the ticker symbol SPY is designed to move at the same percentage that the S&P 500 moves. Some ETFs are leveraged, which means they are designed to move at two or even three times the rate that their underlying indexes do. SDS, for example, is an ETF designed to rise and fall two percentage points for each percentage point the S&P 500 moves. Thus, in a rising market, SDS will offer double the gains that the S&P 500 offers.
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