In a nutshell, there's no way for us to tell you exactly what your stock portfolio should look like, but as long as you diversify and stick mainly to stocks (or funds) that have a proven record of success, you should be just fine. Under 30? This article from DQYDJ suggests that “over a long enough time period…there would have to be a major change in equity market behavior for you to come out worse on the back end.” 3 Furthermore, you may not have the same responsibilities as an older investor (such as supporting a family), which allows you to be bolder with your investments. Doing so can get you the right combination of growth and income, while still allowing you to sleep at night. And while a traditional 401(k) is a great place to start, there are also other methods that can help supplement your savings. For one, you have more time to recoup potential losses. As a general rule of thumb, subtract your age from the number 110 in order to determine your target stock allocation. Vanguard's Total Bond Market Fund is one good example of a diversified, low-cost option. Bonds are debts while stocks are stakes of ownership in a company. For instance, a target-date fund intended for people retiring in 2055 might have 90% of its assets in stocks and 10% in bonds, while a fund intended for 2020 retirees may have a 50-50 mix. Stocks offer an ownership stake in a company, while bonds are akin to loans made to a company (a corporate bond) or other organization (like the U.S. Treasury). 3 Source: DQYDJ. The choice of whether to invest in stocks or bonds is a personal one, and there is no simple answer. July 1, 2016. If you plan to invest in mutual funds, here are a few more definitions you should know: If you decide to invest in individual stocks, it's a good idea to choose at least 15-20 stocks across a variety of sectors, and a few from each major category above (growth/value, large/mid/small). Bonds are safer for a reason⎯ you can expect a lower return on your investment. Also on the concept of diversification, if you plan to invest in mutual funds, it's important to spread your money around. Investopedia Staff. The Ascent is The Motley Fool's new personal finance brand devoted to helping you live a richer life. 5 Source: Investopedia. The Importance of Diversification. And there is a full range of credit ratings, depending on the strength of the bond's issuer. The Differences Between Stocks vs. Bonds. Stocks can be particularly appealing to younger investors for a number of reasons. To further complicate matters, there is a wide variety of risk within stock investments. According to CNN Money, large stocks on average have returned 10% per year since 1926 vs. a 5–6% return for long-term government bonds. 2. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. There is no one right answer when it comes to investing. Here's a thorough discussion about target-date funds if you're interested. Of course, regardless of how you choose to invest, what matters is starting early. Stocks are more suitable to a higher risk tolerance, whereas bonds … While their prices fluctuate in the market—sometimes quite substantially in the case of higher-risk market segments—the vast majority of bonds tend to pay back the full amount of principal at maturity, and there is much less risk of loss than … 4 Source: Investopedia. No discussion of asset allocation would be complete without mentioning target-date retirement funds and whether they are good choices for your investment portfolio. While there is no one-size-fits-all asset allocation strategy, by analyzing your personal situation you can determine the best asset allocation for you. Bonds are safer for a reason⎯ you can expect a lower return on your investment. On the other hand, let's say that you're 55 and want to retire early. March 11, 2016. It's important to mention that when we say "cash," we're referring to actual cash and similar investments such as money market accounts. If you feel comfortable taking a little more risk in exchange for the potential of higher long-term returns, you may want to substitute 120 for 110 in the allocation formula, resulting in a higher stock exposure. Bonds lack the powerful long-term return potential of stocks, but they are preferred by investors for whom income is a priority. The returns on stocks are dividends that are not guaranteed and depend on the performance of the company. For one, you have more time to recoup potential losses. Bonds vs. Stocks The choice to invest in bonds vs. stocks comes down to risk tolerance and whether an investor can take the chance of losing it all to win big, or needs a slow steady stream of growth. The main differences between stocks and bonds are straightforward, but some of the differences between the two can be a bit blurred. Remember that the main reasons for allocating a portion of your portfolio to bonds are to offset the intrinsic volatility of stocks and produce a reliable stream of income -- not to produce long-term compound growth or beat the market. At The Motley Fool, we're obviously in favor of choosing individual stocks, as long as you have the time and desire to properly research investments. Stocks are treated as equity instruments whereas bonds are debt instruments. For example, if you're 35, this rule says that approximately 75% of your assets should be in stocks. As a young professional, there’s enough going on in your life that building your wealth may feel like a far-off fantasy. July 21, 2016. Speculative stocks and established blue-chip companies are two entirely different things, so we'll discuss that in more detail later on. Also, bonds are less risky than stocks. Market data powered by FactSet and Web Financial Group. You can choose government bonds such as treasuries, municipal bonds, or corporate bonds. Fortunately, for the majority of investors, a bond-based mutual fund or ETF is sufficient to meet their needs. The short answer: not much. While stocks are riskier, bonds offer less of a chance for a big return on investment. It is intended to promote awareness and is for educational purposes only. 5 Let the magic of compounding do the heavy lifting, and you’ll be saving money and building your wealth in no time. Stocks have the potential for higher returns, but are also higher risk. A target-date retirement fund (also known as a lifecycle fund) is a form of mutual fund that invests in a combination of stocks and bonds, gradually shifting its asset allocation from stocks to bonds as the target date approaches, and beyond. Having said all of this, if you need capital preservation (if you're already retired, for instance), it's completely fine to keep a small percentage of your investment assets in cash if you don't feel comfortable being fully invested in stocks and bonds. So, which types of investments are best for you: Stocks vs Bonds? The four allocation samples below are based on a strategic approach, meaning you are looking at the outcome over 15 years or more. The answer to this question depends on a few factors. In this case, you can use 100, or even less, to determine the proper stock allocation for your age. As you get older, you should begin shifting some (but not all) of your assets into bonds, which are generally lower in volatility and produce consistent, reliable income. See you at the top! You have almost enough money to live a comfortable life in retirement, so your main goal is simply not to lose money. For example, there are stocks that pay dividends that are equal to or higher than bond … Here's a guide to help you make the best decisions for the asset mix in your portfolio. When considering whether to invest in bonds vs stocks… When it comes to investing in stocks, whether you plan to choose individual stocks or buy mutual funds or ETFs, you have a lot to choose from. Most people will want to allocate their assets among both types of investments, as well as others, to create a balanced mix. Ultimate Guide to Retirement: How Do Bond Returns Compare with Stock Returns? Stocks typically trade on various exchanges, while bonds … Stocks and bonds differ dramatically in their structures, payouts, returns, and risks. Rose Johnson. Having said that, if you prefer a hands-off approach to investing and don't want to worry about shifting your asset allocation as you get older, a low-cost target date fund can be a good option. This article is not an endorsement of any particular product, service or organization; nor is it intended to provide financial, tax or legal advice. Experts generally recommend that you aim to have six months' worth of your living expenses in a cash account, in order to be able to cover unforeseen expenses without tapping into your investments, borrowing the money, or selling something. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment. The point is that there's no simple answer. You have three main choices when it comes to investments in a brokerage account or retirement plan: stocks, bonds, or cash. Unlike bonds, stocks tend to be quite volatile; it's not unusual for a stock's price to fluctuate by more than 50% in a single year. When considering whether to invest in bonds vs stocks, you need to consider risk and reward. 5 Advantages of Investing in Your 20s. There is no one-size-fits-all answer to the question of proper asset allocation, and your ideal mix depends on your age, risk tolerance, and time frame until retirement. 1 No matter how the value of the bond fluctuates, you are assured a specific percentage yield on your initial investment⎯albeit a slightly lower one than what you might expect from a stock investment. Here are 4 tips to help you with your choices. There is no one right answer when it comes to investing. 4. Provided that you have some sort of emergency fund, we think that 100% of your investment accounts should be in stocks and bonds.

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