Should I Be Investing in Bonds vs. Stocks?
What you should invest in depends on your investment objectives. Historically, stocks have had better returns than bonds, but that does not mean that stocks are better in your particular situation. The starting point is to determine what you would like to accomplish and then see if bonds are the best vehicle to achieve your goals.
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Current Income
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If you need current income, bonds are your first choice because they pay regular interest. The amount of interest is usually fixed and inflation can erode its buying power over time. Some stocks pay regular dividends and some have a history of raising dividends over time. If you buy dividend stocks for income, you may get less upfront, but rising dividends will provide a hedge against inflation.
Capital Preservation
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If preserving what you have is your main concern, bonds are your first choice. U.S. government bonds are insured as to the timely payment of interest and principal at maturity. Some corporate and municipal bonds are privately insured, and the default rate among high-quality corporate bonds issued by blue-chip companies such as General Electric is very low.
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Needing Money by a Certain Date
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If you need cash by a certain date, for example to pay college expenses, you may want to buy bonds that mature by that date to make sure that you will have the money no matter what happens in the market, and if you want some growth as well in the meantime you can always reinvest the bond interest in a growth stock mutual fund.
Diversification
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For most investors and in most situations it's not a question of choosing between bonds and stocks but finding the right balance between the two to achieve your objectives. Most investors have multiple goals and fairly complex situations. Bonds and stocks work differently and provide different benefits, so in most instances investment goals are best addressed by a combination of stocks and bonds.
Timing
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Bond and stock returns vary from month to month and year to year depending on multiple factors such as economic and political conditions. There are periods when investors are better off staying away from stocks. During those periods, bonds may offer a better return potential. Timing the market is possible but difficult and risky: if an investor's assessment of a market climate is incorrect, her moves can result in losses.
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