Stocks VS. Bonds
As you prepare for retirement, it's essential to understand the different types of investments available to you. At Fortress Financial Group, we believe in empowering our clients with knowledge so you can make informed decisions about your financial future. Let's dive into the basics of two fundamental investment types: stocks and bonds.
What Are Stocks?
When you purchase a stock, you are buying a share of ownership in a company. This means you have a claim on part of the company’s assets and earnings. Stocks are also known as “equity” investments because you own a piece of the company.
For example, if you invest $5,000 in a company’s stock priced at $50 per share, you own 100 shares. If the company performs well and the stock price increases to $75 per share, your investment grows to $7,500.
History of Stocks: The concept of stock ownership dates back to the Dutch East India Company in the early 1600s, which issued shares to fund its trading ventures. This marked the beginning of stock markets¹.
Pros of Investing in Stocks:
Potential for High Returns: Going back to 1928, stocks, represented by the S&P 500, have outperformed most other types of investments².
Liquidity: Stocks can be easily bought and sold, providing flexibility if you need to access your cash quickly.
Tax Implications: Long-term capital gains on stocks are taxed at favorable rates, often lower than ordinary income tax rates³.
Cons of Investing in Stocks:
Volatility: Stock prices can be highly volatile, fluctuating significantly in response to market conditions.
Risk of Loss: If a company underperforms or fails, you can lose some or all of your investment.
What Are Bonds?
Bonds are essentially loans that you, as an investor, give to a company, government, or other organization. In return, the issuer promises to pay you regular interest payments and repay the principal amount at the bond's maturity date.
History of Bonds: Government bonds have a long history, with the first recorded issuance in 1693 by the Bank of England to fund a war effort. Corporate bonds became more prevalent in the 19th century as companies sought funding for expansion⁴.
Pros of Investing in Bonds:
Predictable Income: Bonds generally provide regular interest payments, making them a stable source of income.
Lower Volatility: Bonds are generally less volatile than stocks, offering more stability in your investment portfolio.
Priority in Bankruptcy: If the issuing company faces bankruptcy, bondholders are paid before stockholders.
Cons of Investing in Bonds:
Interest Rate Risk: Bond values can decline if interest rates rise, as newer bonds may offer higher returns.
Lower Returns: While safer, bonds typically offer lower returns compared to stocks.
Liquidity Issues: Some bonds can be harder to sell before maturity without incurring losses.
Historical Comparison:
Stock vs. Bond Returns Over the past 50 years, the average annual return for the S&P 500 has been approximately 12%, while long-term government bonds have returned an average of about 6-7% annually1. This significant difference highlights the potential for higher returns with stocks, albeit with greater risk.
Combining Stocks and Bonds in Your Portfolio Stocks and bonds each have their unique benefits and risks. For many investors, the optimal strategy is not choosing between stocks and bonds but rather balancing both in their portfolio. This approach leverages the strengths of each asset type and helps mitigate risks through diversification.
Non-Correlated Assets: Stocks and bonds often do not move in tandem. When stock prices fall, bond prices may rise, and vice versa. This non-correlation can help stabilize your portfolio during market fluctuations.
Consult a Financial Planner Deciding how to allocate your investments between stocks and bonds is crucial for a well-rounded retirement strategy. At Fortress Financial Group, our financial planners and financial advisors in Rochester, Minnesota are fee-only fiduciaries dedicated to providing unbiased, transparent advice. We help you understand your investment options and craft a strategy tailored to your financial goals.
Conclusion Understanding the differences between stocks and bonds is a foundational step in making informed investment decisions. By combining these assets in your portfolio, you can benefit from potential growth while managing risk. If you have more questions or need personalized advice, visit our website at fortressfg.net to schedule a consultation with one of our experienced advisors.
References
¹ A Brief History of the Stock Market. Retrieved from https://www.sofi.com/learn/content/history-of-the-stock-market/#:~:text=Who%20Created%20the%20Stock%20Market,Amsterdam%20stock%20exchange%20was%20created.
² Historical Performance Retrieved from https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
³ Tax Policy Center. Retrieved from https://www.taxpolicycenter.org/briefing-book/what-capital-gains-tax
⁴ A Brief History of Bond Investing. Retrieved from http://bondfunds.com/education/a-brief-history-of-bond-investing/
Disclosures:
Fortress Financial Group LLC (“FFG") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where FFG and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at https://fortressfg.net/. For current FFG information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with FFG’s CRD# 315329.
Stock investing involves risk including the loss of principal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
