Stocks vs. Bonds: 4 key differences to help you decide which investment is right for you
As a young professional, there’s enough going on in your life that building your wealth may feel like a far-off fantasy. And while a traditional 401(k) is a great place to start, there are also other methods that can help supplement your savings. Creating an investment portfolio is one simple⎯ and practical⎯ option to help grow your funds. So, which types of investments are best for you: Stocks vs Bonds? Here are 4 tips to help you with your choices.
Investing in Stocks vs Bonds
1. Bonds are typically a more conservative investment.
Unlike stocks, bonds come with fixed interest rates that promise a certain return. 1 No matter how the value of the bond fluctuates, you are assured a specific percentage yield on your initial investment⎯albeit a slightly lower one than what you might expect from a stock investment.
2. With risk comes reward.
When considering whether to invest in bonds vs stocks, you need to consider risk and reward. Bonds are safer for a reason⎯ you can expect a lower return on your investment. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment. According to CNN Money, large stocks on average have returned 10% per year since 1926 vs. a 5–6% return for long-term government bonds. 2
3. You can play the long game.
Stocks can be particularly appealing to younger investors for a number of reasons. For one, you have more time to recoup potential losses. This article from DQYDJ suggests that “over a long enough time period…there would have to be a major change in equity market behavior for you to come out worse on the back end.” 3 Furthermore, you may not have the same responsibilities as an older investor (such as supporting a family), which allows you to be bolder with your investments.
4. When in doubt, diversify.
Still unsure about whether to invest in stocks or bonds? There is no one right answer when it comes to investing. Bonds and stocks react differently to adverse events, meaning a blend of both investment vehicles can add increased stability to your portfolio. 4
Of course, regardless of how you choose to invest, what matters is starting early. 5 Let the magic of compounding do the heavy lifting, and you’ll be saving money and building your wealth in no time.
This article is not an endorsement of any particular product, service or organization; nor is it intended to provide financial, tax or legal advice. It is intended to promote awareness and is for educational purposes only.
1 Source: The Finance Base. Why Bonds Are Safer Than Stock. Rose Johnson. 2 Source: CNN Money. Ultimate Guide to Retirement: How Do Bond Returns Compare with Stock Returns? 3 Source: DQYDJ. Under 30? Here’s Why You Should Invest in the Stock Market. PK. March 11, 2016. 4 Source: Investopedia. The Importance of Diversification. Investopedia Staff. July 1, 2016. 5 Source: Investopedia. 5 Advantages of Investing in Your 20s. Jean Folger. July 21, 2016.