This is the idea that one must assume risk (uncertainty) to obtain excess expected returns. It is by no means ubiquitous: assuming risk may reduce expected returns. For example, people assume risk to gain exposure to negative expected returns in a casino (roulette, blackjack, &c). No doubt there are plenty of examples in financial markets where risk does not automatically yield excess expected returns.
In theory, all financial institution optimize around something like the efficient frontier. This should ensure that higher risk corresponds to higher returns. In practice, quantitative finance goes through a lot of approximations, therefore some real portfolios could be strictly dominated by other choices.
You imply that one should invest where economic growth is expected to be highest. Note that it does not follow that shares in high growth companies (or countries) will lead to high returns. This is because the expected future growth may well be built into the current price. That is, if everyone thinks something will be likely worth a lot in the future, the current price will be bid up to reflect this. It is the uncertainty of the outcome that may arguably cause higher expected returns. If people have a distaste for uncertainty, then the price might be bid down leading to higher expected returns.
This is one of the reasons for the low-growth/low-variance profile of the more developed countries' markets compared to the high-growth/high-variance profile of the developing ones.
[EDIT: Through conversation with Rolf Andreassen below, it has been brought to my attention that I am simply completely and irretrievably insane.
Sane and well-measured advice is therefore wasted on me, and I just wanted to edit in this notice here so that other well-meaning folks don't get tricked into wasting their time trying to talk sense into a total nutcase like me. :)
(I appreciate all y'all, though. ^^ ) ]
So my dad set up a trust fund for me when I was a kid, and I've got 13k (CAD) now, which I am going to be taking direct control of.
Now, I have no interest in making a deep study of investment. I have a life to live and dealing with money is boring.
The only thing more boring than dealing with money, is dealing with a lack of money, and so I want to optimize the time and thought I spend avoiding that down to a minimum.
Four things occur to me:
1) Taking the naive and sparse knowledge I have of this area, basically just stuff I‘ve randomly osmosis’d up, this is my train of thought:
Markets are essentially random walks with an upward trend?
“Index funds” are magic boxes that you put money in and your money will grow at the same rate of the market that the fund “indexes”?
“Developing world” economies generally grow a lot quicker than those in the “developed world”?
(This makes sense to me. Places like the US, Canada Europe, etc, already have mature transportation and communication infrastructure. You can't get much economic growth out of doing basic stuff like building a new highway here, but in, like, some African region that has previously been served by, I dunno, jungle-donkeys, it makes a proportionally much bigger difference.)
There are a few countries where “developing” is a euphemism for “totally messed up”, but in general it really does mean “growing”?
And there are enough of these places over the world, and they're independent enough, that natural disasters/political trouble/etc in a few of them still leave a consistent and high rate of average growth?
So shouldn't I just put all my money in a fund that “indexes” all these "developing" economies together?
2) My dad set up this trust fund with a bank that has a bunch of big expensive physical buildings for some reason. I recently read a letter from them saying that they will charge a $100 yearly fee for having less than 15k in an account.
Are there better options I should be taking than opening my own account with an institution that thinks it makes sense to charge me a hundred bucks for not being rich?
3) Me and muflax are actually going to go work full time on developing [this totally amazing educational technology that will completely revolutionize human civilization but you have no reason to care about that until you've seen a demo in action so nevermind].
We might spend as much as a year (yeah, that's outside-view calibrated) working on it until we have something we can make a living off of while continuing development.
We think we can get total living costs for a year down into the 5k..10k range… maybe even lower. We're going to be living in the UK, because of reasons.
So… can I leave this measly 13k in an investment account and still draw out of it for monthly costs?
4) Or is this whole “investing” thing something I should even be bothering with at all right now?
Should I just pop out the whole sum into a savings account that I can draw from as I need, and worry about reinvesting whatever is left over then, a year from now, after we have obviously started on our way to becoming rich and famous?