Should I Be Investing in Bonds Versus Stocks?
In a previously written article titled What’s the Difference Between Stocks and Bonds you learned about what bonds are and how they work, now let’s try to put things together and see how bonds figure in your portfolio. There are three main reasons why bonds will prove to indispensable in your portfolio and will make for a sound investment.
- A steady, stable, and dependable stream of income: The reason why bonds are often called as fixed-income securities is because they provide just that: a dependable, steady source of income. The premise on which you would make an investment of this sort in bonds is that this would make for a better return on your investment than what you would have gotten if you let your cash sit idle in a checking or savings account or even a money-market fund.
- Protecting your Portfolio: One of the other reasons why bonds make for an attractive investment is that they provide a cushioning effect to your portfolio. Since they carry much lower risk than equity, they don’t fluctuate as much as stocks do and hence provide a firm, well-paying foundation to your net-worth.
- Tax Advantages: The money in your bank account doesn’t have much of a tax advantage. On the other hand, some of the bonds have certain tax advantages for you while investing or while taking your money out for use. This will prove to be quite an advantage if you are anywhere near the 28% tax bracket.
How Do Bonds Figure in Your Portfolio? Is Investing in Bonds Worth it?
To have a complete understanding as to how bonds would figure in your portfolio, it is important to take note of some historic returns of the U.S Bond Market. A glimpse of your country’s bond market performance over a period of time is enough to give you this perspective.
Long term, bonds are much less lucrative than stocks, but are much less risky and volatile. Just like the stock markets, bond markets have let down investors in the past. A good historic example is when the bond market crashed in the year 1994 which amounted to an average loss of about 5% for each investor. However, on a positive note, large company stocks have returned about 11% from 1970 to 1990, while bonds have averaged about 8.9%.
You must have realized that bonds are not money makers in the real sense, but they provide a veritable pillar of support for your investment corpus. They will help you sustain the wild swings of the stock market and ensure that you will have something to live on.
This post is part of the series: Bonds, Fixed Income Securities and Debt Markets
Everything about bonds, bond markets, interest rates, debt markets and investing tips can be found in this series.