Stocks and Bonds are both asset classes and both excellent forms of investment. They each possess their own sets of advantages and disadvantages. I will be going over the pros and cons so that you can make informed decisions if you are considering investing in either choice, of course.
Before that, let’s quickly go over some simple definitions:
- A bond is a fixed income debt instrument, which is mainly a loan made out to borrowers, typically, corporations, or government agencies.
- Stocks, on the other hand, represent an ownership stake in publicly traded corporations.
Advantages of owning Bonds. (Risk-Averse)
- Stability of principal
- Generates a steady income
- Less risky
Disadvantages of owning Bonds.
- Lower returns
Advantages of owning Stocks. (Risk Tolerant)
- Higher returns than bonds
Disadvantages of owning Stocks.
- No guaranteed return
So which is better?
I will say it depends on your stage in life, and the level of risks you can take. It is recommended to have a mix of both. When you are just starting, you may have only about 5% of your portfolio bonds, but you should consider increasing the proportion as you advance in age. You need the stability and steady income at retirement to avoid market crashes.