Stocks & Bonds. Stocks & Bonds. Those words seem to go together, like peanut butter and jelly, or crackers and cheese. While the two often appear as a unit, they’re not the same type of investments.
If people buy shares of stock, they purchase small pieces of large corporations. If they buy bonds, they become debt holders. They loan some of their money to business enterprises or government units, such as public school districts, counties, cities or states.
When investors own bonds, earnings are more predictable
Governments or companies that sell bonds promise to pay back all initial investment amounts, with interest, at a specific future date. Stocks, instead, often reward owners with quarterly dividends. Stocks can increase in value, paying off even more, but stock prices can also decrease. Rising rates for shares of stock may be more profitable, but are not always predictable. Any kind of problem can affect stock prices.
Many investors view bonds as safer than stocks, because bondholders can count on getting their money back once the bond matures. Just as with childhood savings bonds, the government and some businesses raise funds by assuring investors of full returns on all that was borrowed, plus accrued interest.
Typically, corporations or governmental bodies borrow money from investors at fixed or variable interest rates. Fixed interest, of course, means that bond owners know exactly how much interest they will earn; for example, 5 percent on a $10.000 bond. As investors grow older, they often convert their more risky stocks into fixed-interest bonds that are more secure places to put their retirement funds.
One rule of thumb. Some financial advisors tell their clients that the percentage of their investments in bonds at retirement should equal their age. In other words, if a person retires at age 65 from the workforce, 65 percent of their investments should be in bonds, just 35 percent in less predictable investments like stocks. Other advisors use different formulas.
Stocks can be more profitable than bonds for younger people who can afford to take the risk, as they have years to earn paychecks to make up for any losses. If elderly investors have other sources of income, such as employee retirement accounts or rental property, they’re likely to take their chances and keep more of their money in the stock market.
To find out where your savings can be best invested at your current stage in life, contact Ronald VanSurksum, certified financial planner, at firstname.lastname@example.org
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