4 answers

Do I Have a Better Chance Of Turning My Money Into Alittle More Over Time By Investing In Bonds Rather Than Stocks ?

Asked Buffalo, New York

4 answers

Emily’s Answer

Updated Bellevue, Washington

Stocks are riskier than bonds are, but historically have higher returns. First, think about when you might need the money. "Over time" can mean different things to different people - do you need to use that money in 3 years, or 30? Be honest with yourself about how much risk you can stomach. "If next week my investments tanked and I'm down 40%, would I sell out of my position? Or would I be okay to wait and recover?" For example, I personally don't need my retirement money for another 30-40 years, so it would not matter to me; I could just wait out the storm. But if instead, I need that money to replace my car next year, it's suddenly a different story.

If you're just getting started and you have a long timeframe, consider investing in ETFs that are based on the stock market, rather than stocks directly. The reason is that a stock always has the potential to go to zero, but a market never will. Even when the markets are bad and you're pulling your hair out, remember that: markets will never go to zero, they're positive way more often than they're negative, and you've got time on your side.

If you're young and you're eligible for a Roth 401k or Roth IRA, do that over a regular 401k or IRA. When you have decades to go before you need to touch that money, you would rather pay the taxes on the bit going in, because that bit could triple, quadruple, maybe even more - and you won't have to pay taxes on any of that growth.

Happy investing!

Emily recommends the following next steps:

  • Open a Roth IRA. If you're a minor, you might be able to open a minor Roth IRA.
  • Research some ETFs.
  • If the investment you're looking at pays dividends and you don't need that cash, sign up for automatic dividend re-investing.

Nick’s Answer

Hi Vernon,


I agree with Paul's answer above.  Bonds are a safer investment but over time, stocks have outperformed bonds by a wide margin.  Below is a link to an article that gives you more information about the performance differences between stocks and bonds.


https://www.investopedia.com/articles/basics/08/stocks-bonds-performance.asp


At a young age, you should be fully invested in stocks.  As you age, you can review your asset allocation mix between stocks and bonds to be more conservative if you prefer.  As a general rule of thumb, you should invest (110%- your age%) in stocks. It is just a rule of thumb-you also need to decide what your risk tolerance is.  In a down market, you will second guess your decision to stay in stocks, but in the long run, it has shown to be the right move. 


Good luck,

Nick


Alice’s Answer

Updated

My suggestion would be to invest in stocks, ETF and Mutual funds.  The stock market has proven to be a good investment over bonds in the long run.  The best thing to do is to start young.  Time is your friend.  Also, if you have an option to invest in a 401K with matching funds from the employer do it! It's free money.  Also, invest in an IRA if you can.  Being young you are probably in the lowest tax bracket you will ever be in.  Putting money away now allows it to grow tax free. 

Paul’s Answer

Updated New York, New York

No. Over the long term the stock market has outperformed the bond market by a wide margin. Bonds are generally considered to be safer investments compared to stocks so the potential rate of return is lower. In order to have the potential for greater gains, you have to be willing to accept more risk.

Updated
Okay Great, So The Higher The Risk The Higher Rate Of Return.