Over the long term, stocks have historically outperformed all other investments. From 1926 to 1999, the stock market returned an average annual 11.4 percent gain. The next best performing asset class, bonds, returned 5.1 percent. Over the short term, stocks can be hazardous to your financial health. Risky investments generally pay more than safe ones.
Investors demand a higher rate of return for taking greater risks.
That's one reason that stocks, which are perceived as riskier than bonds, tend to return more than bonds. The longer investors have to wait for their final payoff on the bond, the greater the chance that something will intervene to erode the investment's value. The biggest single determiner of stock prices is earnings. Over the short term, stock prices fluctuate based on everything from interest rates to investor sentiment to the weather. But over the long term, what matters is earnings.