Stocks Versus Bonds

Stocks VS Bonds

Stocks versus bonds, what are they and which one will give off a better return? That is a question you are probably asking yourself if you want to invest your money for the long term in hopes of growing your money.

So, which is better for long term investing? Well first let’s look at what they are.

Stocks are equity in the company, whenever you buy a stock you invest into a portion of that company. As the company grows so does your stock. Investors may also receive something called a dividend which is a percentage of the company’s earnings that is paid out to all shareholders.

Bonds on the other hand are simply debt. Whenever you buy a bond you are buying debt which the company has to pay back to you in the form of interest payments. At the end of the bond’s life cycle the company buys back the bond from you at whatever price it is trading at and hopefully that together with the interest payments you received allowed you to make your desired return.

Stocks Versus Bonds : Returns

Over the long term the yearly average stock return is around 10%, with the potential to be much higher if you take the time to do your research. Bonds on the other hand are divided into two categories, long term and short term.

Long term bonds may average around 4.9% annually depending on the bond while short term bonds average considerably less. Bonds rarely outperform stocks over the long term. But why is that? Why do bonds give lower returns then stocks?

The answer is simple, stocks are riskier. Whenever you buy a bond the rates are more fixed. There is a lot less short term volatility and investors are willing to accept the lower interest rates in order to receive more security.

Stocks on the other hand are different. There is no guarantee that you will make money. You could, or you could lose it. But by taking calculated risks you will probably come out on top over the long run.

It is the same as real life, the man who only ever goes for the for sure thing may do better than the man who takes calculated risks in the short term. But the man who takes calculated risks tends to do better in the long term.

Stocks vs Bonds Balance

It is widely believed that because bonds do better in the short term and stocks do better in the long term that having a balance between the two is normally the best thing you can do.

The recommendation most people will give is the older you are the more money you should have into bonds and the less into stocks.

The idea is that the % of your portfolio that is in bonds should equal your age. For instance if you are 40 then 40% of your portfolio should be in bonds and 60% in stocks. This way you can receive the income from the riskier investments, but your investments are also safer as you grow older.

Personally I believe if you want to invest long term and have at least 20 years to invest it is probably a wise bet that investing into stocks is going to benefit you more than investing into a mixture of stocks and bonds especially if you do your homework.

When it comes to stocks versus bonds everyone has their own opinions, but the simple truth is that stocks are riskier but offer higher returns. Bonds are safer but offer lower returns. Deciding what fits your personality best should be your first concern.

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