Stocks and bonds each have a different level of risk and behave differently in response to changes in the financial markets. They may also be key ingredients in your mutual funds.
Putting portions of your money into different types of investments could help you in case some of them don’t measure up.
Pros
- Stocks typically have potential for higher returns compared with other types of investments over the long term.
- Some stocks paydividends, which can cushion a drop in share price, provide extra income or be used to buy more shares.
Cons
- Stock prices can rise and fall dramatically.
- There is no guaranteed return.
Bonds
Pros
- Bonds tend to rise and fall less dramatically than stocks, which means their prices may fluctuate less.
- Certain bonds can provide a level of income stability.
- Some bonds, such as U.S. Treasuries, can provide both stability andliquidity.
Cons
- Historically, bonds have provided lower long-term returns than stocks.
- Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.
As you can see, each type of investment has its own potential rewards and risks. Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns.
By owning a mix of different investments, you’re diversifying your portfolio. Doing so can curb the risks you’d assume by putting all of your money in a single type of investment.
