Stocks vs. Bonds: How To Choose the Best Investments
Written by
Andrew Lisa
Edited by
Emily Gadd
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Stocks and bonds are the greatest one-two punch in the investment world.
They earn money for investors in different ways and have different risk-reward considerations. Either or both can be sound investments, but only for those who understand their differences and how to factor in variables like liquidity, age and risk tolerance.
Here’s what you need to know.
What Are Stocks?
Stocks are ownership shares that publicly traded companies sell to raise money for business operations like labor, technology, infrastructure, equipment and acquisitions. Investors who buy stocks purchase an equity ownership stake in the companies that issue them.
If the company grows and profits, the shares appreciate and the investment pays off, and many companies also distribute dividends that shareholders can use as income or reinvest.
Benefits of Investing in Stocks
Stocks offer growth potential that bonds can’t match. For example, in 2024, some stocks delivered returns of 100%, 300% and even 700% or more. Those results are outliers, but the benchmark S&P 500 rose by 23% — not a bad haul considering that it’s money earned without the exchange of labor.
Stocks also provide liquidity. Shareholders can convert their holdings to cash nearly instantly whenever they want — and as partial owners, they enjoy the right to vote on company business.
Risks of Stocks
The S&P gained 23% in 2024, but in 2008, that same index shed nearly 40% of its value, devastating retirement funds and investment portfolios for years to come.
Market downturns are inevitable, and stocks are subject to intense volatility that can be stomach-churning, particularly for older investors who don’t have time to recoup lost gains. If a business goes bust, which some do, stock investors can lose some or even all of their money.
What Are Bonds?
Bonds are loans that investors make to governments and corporations. In exchange for the loan, the bond issuer makes regular interest payments to the investor on a set schedule and, upon maturity, returns the principal.
Benefits of Investing in Bonds
Bonds are not without risk — no investment is — but they’re far less risky than stocks, and the interest payments they distribute provide investors with regular, predictable income.
Risks of Bonds
Bonds deliver comparatively modest returns, but that’s not their only drawback. Yields have a converse relationship with bond prices, which can fall when interest rates rise. Also, inflation can outpace a bond’s yield and bonds aren’t as liquid as stocks or as easy to sell — but the biggest risk involves credit.
If the borrower fails to repay, investors can lose their principal. It’s rare but not unheard of.
Key Differences Between Stocks and Bonds
As a stock investor, you’ll get to experience the thrill of watching a red-hot stock soaring up, up and up some more as today’s gains pile on top of yesterday’s.
However, on the market’s many nerve-wracking down days, you’ll be thankful for the bonds in your portfolio.
Risk and Return
An immutable rule of investing is that the greater the potential reward, the higher the risk.
- Stocks typically offer higher returns but come with a greater likelihood of loss.
- Bonds provide steady income and only mild risk but usually offer lower returns.
Investment Goals
The “right” investment depends on your objectives and what you hope to achieve.
- Stock investors can pursue short-term gains or long-term growth.
- Bonds are better for income generation and capital preservation.
For most investors, a combination of stocks and bonds in your portfolio will help you reach your financial goals.
Market Volatility
There’s a good reason that most advisors recommend shifting away from stocks and toward bonds as retirement draws near and investment horizons shorten.
- Stock prices can fluctuate significantly in the short term — a market crash just before retirement can be devastating.
- Bonds tend to be more stable with predictable interest payments.
Should You Invest in Stocks vs Bonds?
If you have a traditional 401(k) or invest in ETFs, there’s a good chance you’re already invested in both.
However, only you and your investment advisor can decide how many stocks or bonds are right for your portfolio. They’ll help you take into consideration your age, goals, risk tolerance and life circumstances.
When to Choose Stocks
Stock investors are usually concerned with long-term wealth-building. They’re after the growth potential that makes equity investing so attractive and exciting.
However, that potential comes with risks, and stock investors must have the stomach for market volatility, the tolerance for loss and a long enough investment horizon to recover should their bets not pan out.
When to Choose Bonds
Bonds are not exciting — and that’s precisely why they’re so popular. They’re ideal for those seeking steady income, minimal risk and calm waters, which is why retirees and those nearing retirement flock to them. Bonds can preserve your capital while still putting your money to work.
FAQ
The answers to the following frequently asked questions can help you decide if stocks, bonds or both are right for you.- What is the difference between stocks and bonds?
- Stocks represent equity ownership shares in companies. Bonds are loans that investors make to governments and corporations in exchange for interest payments.
- Which is safer, stocks or bonds?
- Bonds are safer than stocks.
- Can you make more money with stocks or bonds?
- Because they’re riskier, stocks have a greater potential to earn their investors more money.
- How do stocks and bonds work together in a portfolio?
- Stocks and bonds are naturally complementary. Stocks provide long-term growth potential that bonds can’t match, but bonds can offer a hedge against the risk that is inherent to the stock market.
- Should I invest in stocks or bonds if I’m retiring soon?
- Most advisors recommend reallocating your portfolio toward a heavier investment in bonds as retirement draws near.
- How do I choose the right mix of stocks and bonds for my investment goals?
- The best way to reach your investment goals is to invest in professional financial guidance.
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