One of the frequently asked questions by investors is whether they should invest in stocks or bonds. It is something that financial advisors often find themselves having to deal with. Most investors tend to think that the best choice is to mix stocks and bonds. Regardless, investors should understand the differences between a stock and a bond as the first step to decision-making about where to put their money.
Often you hear financial experts and investors use the terms stocks and bonds in the same breath. Many people end up thinking that they are two sides of the same investment. Unfortunately, they are dissimilar. You ought to understand that stocks and bonds are different investments and entirely different from each other. They only complement each other. More often than not, financial experts will advise you to create your portfolio with a balanced mix between stocks and bonds. However, if you choose one of the two, which will be the better investment? The following pointers should enable you to make a sound decision:
Bonds are a more conservative investment
Unlike stocks, bonds provide fixed interest rates that promise to deliver a particular return. No matter how the bond value fluctuates, the investor is guaranteed a specific yield on the initial investment. However, it might be slightly lower than the return you might expect to get from a stock investment. Generally, the greater the yield of a bond, the greater the risk.
More risk, more reward
If you are not sure whether to invest in stocks or bonds, you should consider risk and reward. If you do not want to invest in a risky option, highly rated bonds are your safest bet. However, if you want more risk and greater return potential, then stocks may be more appealing.
Bonds are safer for a reason. If you invest in them, you should expect to receive a set return on your investment. On the other hand, a well-diversified pool of stocks combines a certain amount of unpredictability in the short term but with a better long-term return potential, although which stocks you invest in, will, of course, make a great difference. If you want higher long-term rewards, a well-diversified bundle of stocks might be the better choice. But if you would prefer a set return, consider investing in high-quality bonds.
Bonds have known returns
In general, bonds have set coupon rates and expiration dates, so if you choose to invest in them, you get the benefit of knowing the potential returns of your investment in advance. It is not like the stock market, where you subject yourself to the uncertainty of return. The interest rate on a bond is specified from the start, and when it matures, the investor is due to receive 100% of the face value of the bond back. Of course, the riskier the bond, the greater the risk of the issuer defaulting, however.
Consider the yield in terms of fixed or variable returns
Stock prices go up and down. A company’s profitability usually affects the price of the stock in the market. When a company is doing well and making profits, stock prices will usually rise when profits exceed expectations. On the other hand, if a company is losing money or performing worse than expected, stock prices will usually fall. When the company is performing terribly and ends up filing for bankruptcy, stockholders are the last to get their money back. There is a chance that shareholders could all lose their investments in a particular stock if things go bad. This will always be a risk for stock investors.
On the other hand, investing in bonds allows you to receive an interest payment at specified intervals. Whether the company is making profits or not, you will earn from your investment as long as it has money to pay debts. The only way you can lose is if the company goes bankrupt or restructures. For stocks, your returns will depend on the price of the shares, which will fluctuate depending on positive or negative news about the company or the economy and market sentiment. For bonds, as long as the company has the financial ability to pay its debt, they are obligated by law to keep doing so.
If you are in doubt, diversify
If you are unsure whether to go with bonds or stocks, it will help to know that there is no one correct answer for investing. Bonds and stocks are different and react uniquely to various events. An investor needs to determine what is the right mix for him or her. Blending both could help stabilize your portfolio.
Ultimately, you are the only one who can decide how to invest. What matters is starting early. Follow whichever option you feel suits your needs better. When it comes to investing, you must be careful lest you end up losing a whole lot of money.
About David Milberg
David Milberg is an experienced financial analyst and entrepreneur from New York City. Milberg is a proud father of three kids. Milberg graduated from Princeton University with a BA in History and graduated from Columbia University with an MBA. David Milberg currently serves as a Senior Vice President at Milberg Factors, Inc.
Over his tenure at Milberg Factors, David has also been involved in numerous not-for-profit activities. In light of David’s charitable work, he was honored in the year 2000 by the accountants and bankers division of Big Brothers Big Sisters of New York and by the Metropolitan Jewish Geriatric Foundation. David Milberg has also been active in the Lincoln Center Business Council.
David Milberg has invested in such major broadway productions as Mel Brook’s The Producers, The Weir, and the hit revival of Pippin directed by Diane Paulus and starring Tony Award Winner Patina Miller at the Leading Player. David sits on the Board of Trustees for The Prospect Theater Company and is a fervent supporter of the Lincoln Center Theater. David Milberg presently serves on the Board of Trustees of the Princeton Triangle Club, where he was Vice-Chairman.
David Milberg has a rich, varied background in musical theater and live stage performance.
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