Stocks
When you buy stock, you own a share of a corporation
and participate in its future. Historically, stocks have
provided the best returns when compared to other
asset classes. According to Ibbotson Associates Inc., a wholly owned subsidiary of Morningstar, Inc., one
of the most widely quoted consulting firms in the
United States, over the last 79 years, U.S. stocks have averaged a 10% return on investment. International
stocks, which Ibbotson has measured since 1970, have
averaged an 11% return.
Although past performance doesn't guarantee future
results, choosing both domestic and international
stocks offers an opportunity to reduce investment
risk through increased diversification, since U.S. stock
markets typically move differently than markets in
other countries. Keep in mind that special risks such
as currency fluctuations and political changes should
be considered when investing internationally.
Source: Ibbotson Associates Inc., a wholly owned subsidiary of Morningstar, Inc., July 2005.
U.S. stocks represented by S&P 500; international stocks represented by MSCI
EAFE Index. Indices are unmanaged and cannot be invested in directly.
Bonds
Think of a bond as an IOU that is issued by a
government or corporation when you loan them
money. The issuer promises to pay back the full
amount of the loan, plus an agreed-upon interest rate,
over a specific length of time. In contrast to stocks,
long-term U.S. government bonds have averaged a
5% return over the last 79 years, according to Ibbotson.
In general, bond issuers offer higher interest rates for
long-term bonds, and lower rates for shorter term
bonds (typically two-year maturity or less). For
intermediate-term bonds (typically two-year to
10-year maturities), the interest rate is normally higher than a shorter-term bond and lower than a long-term
bond. Keep in mind that, when interest rates rise, bond
prices fall (and vice versa).
Source: Ibbotson Associates Inc., a wholly owned subsidiary of Morningstar, Inc., July 2005.
U.S. bonds represented by the U.S. Long-Term Government Index.
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