The short answer is a simple “yes.” The long form is a bit more complicated. Whether you’re looking to dip a toe into the investment pond or expand a preexisting portfolio, chances are you’re weighing the risk versus reward of various investment strategies. Stocks and bonds are two of the most popular securities, and a diversified portfolio should contain its fair share of both.
Most investors don’t truly understand what they’re investing in. A bond is actually a type of negotiable financial contract that certifies indebtedness of a bond issuer to a bond holder. As the investor, you’re going to be the bond holder. These debt securities are considered negotiable because they can be transferred to a secondary market and their obligations can be assigned to a third party. Bond holders accrue interest on their loan over a fixed number of years at which point they receive payouts much larger than what they originally paid in. Because the value of a bond over time is tied to a fixed interest rate, bonds are generally considered among the least risky investments. The only way you’re going to lose money on your bond is if the issuer goes bankrupt or otherwise defaults on his or her obligations. If that issuer is the United States government, chances of default are infinitesimal.
Capital stocks aren’t debt securities at all. When you purchase a stock you’re purchasing an ownership share in a company. Businesses issue public stock in order to raise operating capital. If you believe in a company’s mission and determine that its financials are sound, you can put up a portion of that capital in exchange for a “share” of the company.
Stocks are generally considered high risk/high reward investments because your fortunes are tied to the fate of the company. When you invest in a bond, you can predict with great certainty how much your investment will pay out. A stock’s value is far more variable. Moreover, myriad external factors including acts of God can affect the value of the stock. These factors are completely unpredictable and can wipe out the value of your stock over night. Just imagine investing a million dollars in a coastal company that has all of its warehouses wiped out by a tsunami. Your stock would be worthless and there wouldn’t be a thing you could do about it. Therein lies the risk.
Before you decide just what your portfolio needs, assess your own level of expertise and how much time you have to devote to investing. If you’re a novice investor with very little time to spend researching publicly traded companies, a few low-risk bonds may be the right choice. On the other hand, if you are or if you employ a savvy financial professional, you may be able to reduce your portfolios risk to the point where investing in stocks is worthwhile. You may even want to consider talking to a forex broker about expanding your portfolio beyond the domestic market.
All other things being equal, the stock market will always be riskier than the bond market. But as any economist will tell you, all other things are never equal. Assess your personal situation to determine what’s right for you.
