Whenever the stock market gets shaky, many would-be investors start weighing their risks and consider investing in Treasury bonds. But what benefits do bonds offer that stocks don’t? You’ve probably heard the conventional wisdom that bonds are slower but more reliable than stocks. But is this true? Which investment style is best for you?
Stocks, or shares, are offered by publicly traded companies for investors to purchase. This allows an investor to own a slice of a company. If you hold more shares, you’ll have more exposure to the company’s performance, for better or worse. On the other hand, bonds are loan agreements offered by companies or governments. When you purchase bonds, you’re loaning someone money they promise to pay back under a set timetable.
There’s no real risk inherent in bonds, and they’ll reliably return your investment over time. Stocks can theoretically yield no returns and could even theoretically hit zero if the issuing company goes out of business.
Most financial advisors quickly note that neither stocks nor bonds are “better” than any other financial instrument, and both are valuable tools for investors to diversify their portfolios. A successful portfolio is almost always diversified among a handful of different stocks, bonds, and other financial products.
When the stock market takes a downturn, bond yields increase and become more attractive. When the economy is roaring, bond yields shrink, and stocks of high-performing companies become much more appealing. Gaining exposure to both of these possibilities is an important aspect of a diversified portfolio.
The best way to weigh your portfolio is to ask yourself how much risk you can tolerate. Many investors do this by considering how many more years they have until they intend to retire from their day jobs. If you’re in your 20s and won’t retire for another 40 to 50 years, it’s better to stick to a portfolio that prioritizes safe investments like bonds over high-risk assets like stocks.
On the other hand, if you’re in your late 50s and might retire in the next ten years, you might want to be more aggressive with your investments. You won’t leave your assets exposed for very long, so the potential upside might outweigh the downside of an economic downturn. Of course, it’s always a good idea to speak to an advisor before making any financial decisions. Most of all, remember that the stock market is never a guaranteed source of income.