Financial Markets

In the chapter on investing, we encouraged you to keep things simple and not be too clever with your investing. In this part, we’ll discuss some of the ways that folks try to be clever.

We’ll talk about what drives stock and bond returns, including the connection to economic growth and the importance of valuations. This is the basic return you should capture if you buy index mutual funds or exchanged-traded index funds.

We will also discuss various ways folks try to improve upon this return. They might do so by guessing the overall market’s direction, overweighting particular sectors or picking investments that perform better than average. In particular, we’ll discuss factors associated with superior stock market returns. We’ll look at various bond market categories, everything from Treasury notes to junk bonds to emerging-market debt. We’ll wrap up this part with an overview of cash investments and alternative investments.

Inevitably, this survey will be less than comprehensive. In their hunger for higher returns, investors employ an astonishing array of strategies—and only a smattering are covered here. The goal of this chapter: Offer some thoughts that might make you a better judge of markets and asset classes, and perhaps allow you to earn somewhat better returns.

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