Final answer:
Historically, stocks have outperformed bonds and savings accounts over the long run due to their higher risk but also higher return potential. The performance of stocks can be volatile, with significant fluctuations, but they offer the possibility of greater gains. Individual stock picking is often less successful than investing in market averages and maintaining a diversified portfolio.
Step-by-step explanation:
In the realm of investments, there is a well-documented relationship between risk and return. Historically, among the common types of investments, stocks have outperformed other options such as bonds and savings accounts in the long run. This performance is attributed to the fact that stocks, while being the riskiest, also have the potential for the highest returns. Bond investments produce average returns that are typically higher than those of savings accounts but lower than stocks, reflecting their moderate risk level compared to stocks. Savings accounts, while the safest investment with very low risk, offer the lowest returns.
The performance of stocks over time can be volatile with significant ups and downs; for instance, the S&P 500 index increased by 26% in 2009 after a decline of 37% in 2008. This volatility is part of what contributes to stocks' potential for high returns. However, it is important to note that attempting to outperform the market by picking individual stocks is challenging and often leads to underperformance compared to market averages.
It is worth considering that a diversified investment strategy that balances different types of assets may reduce risk while still taking advantage of the potential for higher returns from stocks. This strategy acknowledges that while individual investors often have difficulty outguessing the market, they can still participate in the growth potential of the stock market without having to pick individual winners.