S&P 500 had a total return

But that is known only with hindsight.
With diversification, you have to commit yourself in advance to
the fact that a variety of securities in your portfolio will move in
different directions or at different paces. The simple 50–50 split of
this example is diversification, but you can do a lot more.
The result of diversification is not always a smaller loss. It can
be a smaller gain. In 2003, the year the stock market began its recovery
from the 2000 crash, the S&P 500 had a total return of
28.7 percent while the return for the Russell 2000 was a stunning
47.3 percent. The combined return was 38 percent.

OPEC succeeded

This analysis shows why OPEC succeeded in maintaining a high price of oil
only in the short run. When OPEC countries agreed to reduce their production of
oil, they shifted the supply curve to the left. Even though each OPEC member sold
less oil, the price rose by so much in the short run that OPEC incomes rose. By contrast,
in the long run when supply and demand are more elastic, the same reduction
in supply, measured by the horizontal shift in the supply curve, caused a
smaller increase in the price. Thus, OPEC’s coordinated reduction in supply
proved less profitable in the long run.

Expense of consumers.

When analyzing the effects of farm technology or farm policy, it is important
to keep in mind that what is good for farmers is not necessarily good for society as
a whole. Improvement in farm technology can be bad for farmers who become increasingly
unnecessary, but it is surely good for consumers who pay less for food.
Similarly, a policy aimed at reducing the supply of farm products may raise the incomes
of farmers, but it does so at the expense of consumers.

U.S. farms

A few numbers show the magnitude of this historic change. As recently as
1950, there were 10 million people working on farms in the United States, representing
17 percent of the labor force. In 1998, fewer than 3 million people worked
on farms, or 2 percent of the labor force. This change coincided with tremendous
advances in farm productivity: Despite the 70 percent drop in the number of farmers,
U.S. farms produced more than twice the output of crops and livestock in 1998
as they did in 1950.

limited capacity for production.

In some markets, the elasticity of supply is not constant but varies over the
supply curve. Figure 5-7 shows a typical case for an industry in which firms have
factories with a limited capacity for production. For low levels of quantity supplied,
the elasticity of supply is high, indicating that firms respond substantially to
changes in the price. In this region, firms have capacity for production that is not
being used, such as plants and equipment sitting idle for all or part of the day.
Small increases in price make it profitable for firms to begin using this idle capacity.
As the quantity supplied rises, firms begin to reach capacity. Once capacity is
fully used, increasing production further requires the construction of new plants.
To induce firms to incur thi

Lehman Brothers Yield Index

In the five years through 2006, the Lehman Brothers High-
Yield Index had a compound annual return of 10.2 percent, twice
the return from the Lehman Aggregate portfolio over that period.
Since 1984, the compound annual return for high-yield bonds has
been 9.8 percent, but their risk level is a standard deviation of
12.3, according to Ibbotson Associates, nearly twice that of the
Lehman Aggregate portfolio.

WHAT TO DO

Younger investors should be taking on the most risk. Other investors
should be scaling up their risk level, almost no matter
what age they are.
We are not asking you to walk the risk plank. We are not saying
that you have to take all your money from a safer place and
move it to a riskier place. We do not want you to have nightmares.