Question

Investment Setting

Discuss some reasons why an investor with a longtime horizon might choose to invest in common stocks, even though they have historically been riskier than government bonds or T- bills.

Answer 1

Yes, it is true that stocks are riskier than government bonds or T-bills. But, the expected return on the stocks is much higher than that of the government bonds or T-bills.

Equity investors expect to be compensated with higher returns for taking higher risk over a longtime horizon.

Investments in government bonds or T-bills offer safety but returns are significantly lower than what could one earn by investing in stocks. The returns from government bonds or T-bills does not even beat inflation many a times. So, investors in government bonds or T-bills actually lose purchasing power.

Investing in the stocks for a long period of time helps investors to beat inflation handsomely.