Stocks and bonds are two of the most common investments, but they have some key differences. Stocks represent ownership in a company, while bonds are essentially loans to a company or government entity. When you buy stocks, you can potentially earn a higher return than bonds. However, stocks are also riskier because the value of your investment can go down. Bonds typically offer more stable returns, but often at lower rates.
For many investors, the ideal approach is to hold a mix of both stocks and bonds based on your financial goals and risk tolerance. Stocks can help grow your money over the long run, while bonds provide income and help stabilize your portfolio. If you’re saving for a short-term goal like a down payment on a house, bonds may make up a larger portion of your portfolio. If you’re investing for retirement decades away, stocks likely take priority.
Younger investors typically have a higher risk tolerance because they have more time to recover from market downturns. As you get closer to retirement, it usually makes sense to shift some of your money from stocks to bonds. A basic rule of thumb is to subtract your age from 110 to determine your stock allocation. So if you’re 30 years old, aim for 80% in stocks and 20% in bonds. At age 60, a 50-50 split may be more appropriate.
Of course, there is no “right” asset allocation for everyone. It depends on your financial situation, goals, and risk tolerance. Don’t be afraid to start with a basic stocks-bonds mix, see how it performs, and make adjustments over time based on your needs. The important thing is that you start investing as early as possible to take advantage of compounding returns.
Over the long run, stocks have historically outperformed bonds and generated higher returns after inflation. But past performance is no guarantee of future results. The key is to find the right balance between stocks and bonds to achieve your financial goals while still sleeping well at night. With the right mix, you can aim for solid returns while minimizing volatility. Discuss your options with a financial advisor to determine an asset allocation tailored to your needs.