One can think of the entire investment universe as dots along a line, where the line means "how soon do I get my return?". In the bond world, this is called "
duration" but I think everything has a duration.
As the date you get your return goes farther and farther into the future, the risk of not getting any return increases. Time is risk, time is money, and risk is money.
A money market fund or bank CD lies at one end of the spectrum, while a highly-speculative investment with no cash flows or negative cash flows lies at the other end. The money market fund or CD pays you its return on a daily basis and is practically guaranteed. But the return is low exactly because the return is quick and guaranteed. Meanwhile, the people buying monkey drawings or memecoins receive no guarantee, have an extremely high risk of losing everything, and may have to wait decades for their ideas to yield a return, if they ever do.
Similarly, dividend stocks recoup their initial investment faster, but because they are eating (distributing) the money they would need to grow, these companies tend to not grow and underperform those businesses that reinvest. Again, you get your money in hand faster, but you get a lower overall return.
I would rank the investing universe (and their currently expected returns) something like this:
Quick and Safe Moneymoney market funds and CDs (4%)
AAA bonds (4.1%)
short duration government bonds (4.2%)
most corporate or muni bonds (4.5%)
long duration bonds (5%)
preferred stocks (5-7%)
dividend stocks (6-9%)
junk bonds or REITs (7-10%)
broad stock index (10%)
growth stocks (15-20%)
highly speculative investments (meme stocks, crypto, PMs)(25%+)
Distant and Risky MoneyOf course, the investments far down the list are increasingly less likely to meet their investors' expectations in any given year. Otherwise we'd all be in the most risky things we could find. And good luck retiring on the returns from a 100% growth stocks or speculative portfolio. The cash flows are just too distant, too lumpy, and occasionally negative, which makes it hard to pay bills. This end of the spectrum is littered with 100% losses too, which require a lot of winners to make up for.
Thus, the "actual return" does not resemble the "expected return". For an illustration, consider how long-duration bonds can return double-digits when rates are cut, or can lose double digits when rates rise. The market is constantly pricing and repricing the odds of any given return for this whole range of assets. I will sometimes express an opinion that a particular asset class is overpriced, given its prospects.
Dividend stocks, for example, are perpetually one of my least-favorite asset classes. These companies tend to have peaked a long, long time ago, are essentially self-liquidating over a long period of time, and will often cut their dividends in the event of a recession. So you as an investor get all the risk of business equity, the additional risk of past-its-prime business equity, little to none of the growth potential, and basically the return of your own equity in a taxable format. If the dividend is 5%, it will take you 20 years just to earn back your initial investment in nominal terms, and if management cannot think of any better use of the money than to send it back to investors, will they be around that long? Why not bump up your risk two notches and go for the increased return potential of the broad index, or down one notch and get the increased reliability of corporate bonds or preferred stock?
My other least-favorite space is the speculative category, where people are busy making up financial products out of thin air, like NFTs, new cryptocurrencies, and hopeless-to-fraudulent startup companies, just to capture investors' speculative allocation. These are simply rug-pull scams masquerading as investments - a legal form of fraud.
