For most people the answer is not one or the other, but how much of each. Stocks and bonds play different roles, and your timeline and comfort with losses decide the balance.
How stocks work
A stock is a small ownership share in a company. You make money if the share price rises or the company pays dividends. Over long periods, US stocks have returned more than bonds or cash, but with deep drops: the S&P 500 fell by roughly half in 2008-2009 and by about a third in a few weeks in 2020.
Good for: goals at least 5 to 10 years away. Main risk: large, unpredictable declines, and individual companies can fail.
How bonds work
A bond is a loan to a government or company. You receive interest, and you get your principal back at maturity if the issuer does not default.
Good for: stability, income, and money you will need in the medium term. Main risks: – Interest rate risk: when rates rise, existing bond prices fall. 2022 was a painful reminder, with many bond funds losing more than 10%. (How interest rates affect markets.) – Credit risk: lower-rated “high-yield” bonds pay more because the issuer may not pay back. – Inflation risk: fixed payments buy less over time. Treasury Inflation-Protected Securities (TIPS) and I bonds address this.
Side by side
- Expected return: stocks higher, bonds lower.
- Volatility: stocks high, high-quality bonds much lower.
- Income: bonds steady, stocks variable.
- Role in a portfolio: stocks for growth, bonds for cushioning and predictable cash.
How to decide your mix
Ask three questions:
- When will I need this money? The closer the date, the more bonds and cash make sense.
- Could I watch my portfolio fall 30% without selling? If not, hold more bonds.
- Do I have stable income? A secure job lets you carry more stock risk.
Old rules of thumb such as “hold your age in bonds” are crude but point in the right direction. Many people simply use a target-date fund, which shifts from stocks to bonds automatically (what target-date funds are). For a fuller method, see how to set your asset allocation.
Buying them
Bond funds or ETFs are the easiest route for individuals. US Treasury bonds, bills and I bonds can also be bought directly at TreasuryDirect. FINRA’s bond basics page explains ratings and yields in plain language.
