(Hint: put your eggs in more than one basket)
- Stock of the company you work for, which has an expected return of 6.4% above inflation.
- A mutual fund invested in stocks, which has an expected return of 6.4% above inflation and management fees.
- Stock in General Products, a large multi-national, which has an expected return of 6.4% above inflation.
Answer: 2. The mutual fund. These investments all have the same expected return. So go for the surest return.
There are no guarantees in the stock market and the performance of individual stocks is highly unpredictable. For example, suppose the following two charts track the price of Your Company’s stock and the stock of General Products over a 10 year period:
Your Company’s stock did better over this 10 year period. However, that might not be the case going forward. Because the mutual fund holds stocks in many companies, you were more likely to get the returns you expect, and get what you expect going forward.
The riskiest investment is stock in Your Company. Why? Because if things go badly your job is at risk, as well as your savings.