Are you drawn to investing but not sure whether you should place your investments in risky stocks or stick to the safe but low yielding bonds? Here are some tips to help you decide which place you should invest.
First, let’s look at bonds. When you buy a bond you are loaning the company or municipality your money with their guarantee of repayment. That means that if something bad happens to the company, your loan will be repaid before any other investors, including the stockholders. That makes buying bonds much safer than stocks. The downside of buying bonds is that the yields are much lower than the expected returns of stock. Today, treasury bonds yield only a few percent and don’t even keep up with inflation rates. And if you buy a bond while interest rates are low and interest rates rise, then the value of your bond will go down. That means yields could even be negative if you don’t buy and hold to maturity. Take some of these factors into consideration before investing in bonds.
Regarding stock investing, buying a share of stock is the same as buying part ownership of the company. That means that you are entitled to a matching portion of their earnings and can reap the rewards of any long term growth the company can deliver. The value of these shares fluctuate based on several different stock valuation methods. And as the economy grows and slows, stocks’ earnings will grow and disappoint. These swings can cause a lot of volatility in individual stocks and the stock market. That is why stocks are more risky than bonds. However, investing in stocks can offer returns of twice or more of that of bonds, making the risk reward tradeoff a good bet for stocks.
When deciding which investment to choose, most experts recommend investing in some of each, with your bond holdings increasing with your age. However, in times of ultra low interest rates, it seems like buying stocks may be a better bet. For now, it probably pays to read up about stock investing for beginners.