Stocks Vs. Bonds: Which One Should You Invest In?

When it comes to investment, there are so many vehicles to choose from. Among the most highly contested ones is the decision between investing in stocks or bonds. If you are a young professional, you may be wondering whether either or both can help you build wealth. The choice will depend on a few factors that define the difference between the two investment options.

1. Are You More Conservative?

Comparing the two options, bonds are a more conservative investment option. While stocks can be dynamic and affected by various market conditions, bonds come with fixed interest rates. They are more predictable and promise a certain return. Stocks, on the other hand, are highly volatile and do not guarantee reward.

Even if the bond will fluctuate during its lifetime, you are assured of earning a certain percentage yield on your investment. Although this will usually be lower than the return received from a stock investment, the guarantee of return makes it ideal for conservative investors.

2. Are You Looking for Fixed Income or Capital Gains?

Stocks and bonds generate income in totally different ways. For you to make money from stock, the shares of the company must grow in value, allowing you to sell at a higher price than you bought them. This way, you generate a profit or capital gain, which can be received as informed or reinvested back into the company. The profit will be taxed as short- or long-term capital gain.

In the case of bonds, they generate cash through regular interest payments. This may come in different forms, including:

Treasury bonds and notes that are paid every six months until the bond maturity

Treasury bills, which are paid at maturity

Corporate bonds, which can be paid quarterly, semi-yearly, yearly, monthly, or upon maturity

You can also sell bonds on the market at a profit (capital gain). However, the predictable fixed income is what makes bonds attractive, especially to conservative investors.

3. Are You a Risk Taker?

A higher risk is usually associated with a higher return. In the decision between making a stock or bonds investment, you will need to consider the risk-reward relationship. If you are a risk-averse or neutral person, bonds are the safer option. The reason is that you can always expect a return even if it is lower than that of stock. The option is risk-free and you do not have to worry about losing your investment.

In the case of stock investment, the risk involved is higher. Essentially, stocks are riskier than bonds because they do not offer any guarantee of returns to the investor. They are also more volatile because in case a company goes bankrupt, bondholders will be paid first before shareholders, who are last in line and can even end up with nothing. Therefore, when you invest in stock, you will be combining a fair amount of unpredictability in the short term with a potential for a higher return on your initial investment. While a large stick can fetch up to 10% per year, a long-term government bond will only get you a 5-6% return on your investment.

4. Are You Investing in the Long Term?

The decision between short-term and long-term investment choices can help in determining which investment vehicle is right for you. Younger investors are particularly more interested in stocks because they offer more time to recoup potential losses.

Over an extended period of time, there will be a major change in equity market behavior allowing you to come out worse on the back end. In addition, most young people do not have the same responsibility as older investors such as taking care of a family. This allows them to be more risk-takers and bolder with their investment.

For people who are older or want to invest for a longer period of time, bonds offer a better option. This may include investors near or in retirement who are looking for a more conservative investment option. With bonds, you get the guarantee of continued payment from your investment and can enjoy reduced risk associated with the investment.

5. Still in Doubt? Diversify

You may look at the choice between stocks and bonds from different angles and still not be able to make a decision. When it comes to investment, there is no right answer. Both stocks and bonds react differently to adverse events and offer different benefits. Therefore, when you are not sure of which one to choose, the best decision is to add both vehicles to diversify your portfolio. This will allow you to grow your investment over time with the benefits of one vehicle canceling the drawbacks of the other.