Bonds Versus Stocks: Which Should You Invest In?
One basic yet crucial choice every investor needs to make is: Stocks or bonds
? What are the benefits and drawbacks of each? Is one objectively better than the other?
==> The Basic Difference Between Stocks and Bonds
At the most basic level, stocks are higher volatility and higher risk but will generate a higher return over a long period of time. Bonds are more stable but generate a lower return over a long period of time.
If you're looking at a 30 year timeframe, buying stocks is the way to go. However, in the short run, your stocks can drop by as much as 18% in one year simply due to market volatility.
==> Creating a Balanced Portfolio
Most people who aren't professional investors need to balance their portfolios with stocks and bonds.
Stocks bring the higher returns in the portfolio, while bonds protect against risk.
Instead of just choosing one or the other, usually you'll want to have a split of both.
60% to 70% stocks in good times is quite common. When the markets are rocky or down, it's quite common for people to lower their stock split and increase their bond holdings.
==> Corporate Bonds Versus Treasury Bonds
There are primarily two different kinds of bonds: Corporate bonds and treasury bonds.
Corporate bonds are bonds offered by companies. Essentially you're lending these companies money in exchange for a fixed return on your investment.
Treasury bonds are loans to the government. By and large US treasury bonds are considered the safest investments on the planet.
Corporate bonds offer a higher rate of return than treasury bonds. Unlike stocks, the return on your corporate bonds don't go down unless the whole company tanks.
Corporate bonds in other words are better investments if you're investing in bonds issued by companies that have a very low chance of going under.
==> Dividend Paying Stocks
One other distinction to be aware of is dividend paying stocks.
These stocks are almost like a hybrid of equity stocks and bonds. Much of a dividend paying stock's return comes from its dividend. The equity value of the stock will still fluctuate up and down based on the company's performance, but a certain part of the return (the dividend) will remain relatively constant from year to year.
Having a handful of dividend stocks can also be a good way to reduce risk while shooting for a high return.
==> How to Manage Your Stock and Bond Split
Picking the actual stock bond split can be tough. You need to watch the markets carefully and judge your own risk comfort level.
As a rule of thumb, a 30-70 or 40-60 bond to stock split is pretty standard. If you're deciding on your allocations for yourself, try to stick closely to the standard splits and move up or down based on how much risk is in the market.
Alternatively, you can have an investing advisor help you make your decisions.
These are the basic differences between stocks and bonds. Whether you're investing your 401(k) plan or your personal savings, you should have a working understanding of what drives returns in both investment vehicles.
by: Angel Noyal
How You Can Win Your Ex Back - The Easy Guide How To Make Burger With A Grinder Money Market Funds Explained: Is It For You? The 5 Most Important Things To Know About Bank Fees The Green Smoothie Habit How To Choose The Perfect Parasol? Enter The World Of High Tech Gaming With The Ps3 Prolonging The Life Of Your Droid X Enjoy The Latest sensation By Htc Things You Should Learn About Water Pressure Cleaning Ensure Pool Water Clarity With Pool Filter Cartridges How To Craft A Motivating Social Circle The Two Main Kinds Of Pressure Cleaners