Stocks Vs Bonds in 401(k)

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Saving enough money for retirement requires wise investing. With pensions no longer as prevalent, 401k plans have become an essential part of retirement investing, whether you're putting your money in stocks or bonds. It's important to invest in both, but each has its advantages and disadvantages.

How Much of Each?

  • Stocks and bonds are the main vehicles for long-term investing, but there's no single answer when it comes to deciding how much of each should be in a typical retirement plan like a 401k. However, it's usually recommended that an investor nearing retirement should own more bonds than stocks. Younger people would have the opposite in their investment portfolio.

Functions

  • It's important to understand how stocks and bonds function. Buying a stock makes the investor a part owner of a company, while buying a bond means the investor is a money lender, whether it's to a company or a government entity.

Benefits

  • Bonds are considered a more safe and stable choice than stocks when investing for retirement. But stocks usually generate much larger earnings over time and are therefore considered better for long-term portfolio growth.

Drawbacks

  • While bonds don't offer the same income potential that stocks do, the latter are much more volatile in terms of value, which can fluctuate widely during the short term, such as month to month.

Considerations

  • A common formula for the balance of stocks and bonds in a portfolio is to subtract the investor's age from 100. The resulting number represents the recommended percentage for stock investments. The remainder would be invested in bonds. For instance, someone who is 55 would invest 45 percent in stocks and 55 percent in bonds.

References

  • Photo Credit Image by Flickr.com, courtesy of woodley wonderworks
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