Asset class with highest long term return

Question

I have heard, as a loose rule, assets classes which have low volatility, generally, have low returns.

Good to hold on to close to retirement time.

Conversely asset classes which have higher volatility generally do better over the long term.

(This is assuming a buy and hold strategy)

So if I were to invest a cash gift, on behalf of a preteen child (i.e., 30-50 year outlook), what would be some assets which would go best over that period?

Answer 1

Due to the efficient market hypothesis, stocks with higher volatility have higher return. If you believe in the efficient market hypothesis, there is no way around that.

Some ways to pick stocks with high volatility:

• Just see how much the stock price has varied for the previous 20 years (only valid for companies having long-term price history)
• Prefer stocks with more debt. But be careful, too much debt and the companies will fail. However, that's better than taking too much debt yourself, because then YOU will fail.
• Emerging market stocks should have higher volatility than developed market stocks. Especially countries like Russia with lots of political risk could form part of a high-return portfolio. (But note I'm not advising you to invest all your money into Russia!)
• Cyclical stocks have high volatility. Things like consumer staples are the opposite of cyclicals, but e.g. automotive industry, construction industry, and many other industrial stocks in general like raw materials production are cyclical.
• Companies in a very early stage have higher volatility. However, you may not be able to invest into startups via the stock market, but post-startup companies that are big and already in the stock market (think Tesla) may be good investments for a high-risk high-return portfolio.
• Mining stocks are heavily cyclical. The prices of materials like lithium vary a lot.
• Banks have a high risk of failing due to lots of debt for the banks (money people have deposited into the bank) and little shareholder equity. Take advantage of that risk, and you SHOULD get pretty hefty returns. But on the other hand, you won't be so happy during the next financial crisis.
• Technology stocks, especially software stocks, are a winner-takes-it-all category, with quite a lot of risk because the company having the second place has no value, and the same is true for the company having the third place, and so on. Diversify well, and you will have the winners in addition to the losers too.

These are just some ways of how to identify high-return high-volatility stocks. Use all of the ways to identify many stocks, and diversify! Diversification and low costs are the only two free lunches in investing.