The Market premium: stocks are better than bonds.
So far in our series, we know that taking more prudent risk will yield higher long-term returns than taking less prudent risk. Applying that to the Market premium, when you invest in bonds, you are lending, which is less risky than owning.
When a company is founded, there are two groups of people taking risk, each in two different ways. First, the founders (think: CEO) will take risk to generate cash by selling off pieces of the company to other people or by borrowing money from other people. The investors (think: you) will take risk to receive returns by buying ownership in the company or lending to it.
Each pair of risks involves both the founders and the investors. One pair of risks is based on ownership and the other is based on debt.
If the company goes bankrupt, there is a good chance that the owners will not make a single dime of return while the lenders will get their portion of whatever the company is sold for.
Here is the catch: if the company succeeds, the owners will enjoy an increase in the value of the company, but the lenders will only ever receive interest payments.
Ugly truth: you cannot make long-term stock market returns with anything else: not bonds, not real estate, not gold, not cryptocurrency.
Beautiful truth: you can easily own thousands of stocks, eliminating the risk of losing everything: remember Prudence?
Simon Joshua is a licensed investment advisor representative at Cornerstone Wealth Partners in Michigan. He has structured his practice around investor coaching and committed himself to leading communities in establishing a legacy of fulfillment.