Stocks vs. bonds: How both can help your portfolio

Investing is all about balance. For your portfolio, you’ll want to choose the mix of investments that aligns with your comfort with risk, investing timeline and financial goals.

Risk and return expectations are associated with each investment you choose. A portfolio made up primarily of stocks will likely have higher return expectations — but also higher risk. On the other hand, a bond portfolio may have relatively lower risk, but this comes with lower return expectations.

Before you talk with your financial advisor about whether stocks or bonds are right for you, it helps to understand what makes each one tick.

What is a stock?

A stock represents fractional ownership of a company. When you buy stock, you become part owner of the business along with all the other shareholders.

Companies often sell stock to get the funding they need for expansion or operations. In return, shareholders may get a say in how a company runs and own a piece of all future cash flows from the business.

Stocks are bought and sold on a stock exchange such as the New York Stock Exchange (NYSE) and in the private market. The term “stock market” includes stock exchanges and marketplaces where other investments are traded.

What are the potential benefits of owning stocks?

Potential for higher returns — By buying shares in a company, you may profit from that company’s performance. Stocks have the potential for appreciation, which historically has produced higher average returns compared to bonds or cash.*

Protection against inflation — Higher costs mean your income doesn’t buy as much. Stocks can offer two key weapons in the battle against inflation:

• Growth of principal
• Rising income

Stocks that increase their dividends on a regular basis can help to balance the higher costs of living over time. But keep in mind, stocks aren’t required to pay or increase a dividend and a dividend can be eliminated at any time without notice.

What are the risks to owning stocks?

Changing value — The value of stocks can fluctuate drastically from day to day, so you’ll need to be comfortable with your investments losing value, even temporarily.

As a rule of thumb, the longer your investment timeline, the more risk you can afford to take. If you’re closer to retirement, you may want more of your portfolio allocated toward investments that hold a steadier value.

No fixed return — Your stock’s value could fall as easily as it could rise. If you sold it while it was down in value, you’d receive less than what you paid for the stock.

What is a bond?

Bonds help companies and governments raise money. When you buy a bond, you’re lending money to the issuer. In return, you receive interest payments (based on a percentage of the bond’s face value) until the bond matures or is called.

What are the potential benefits of owning bonds?

Income and stability — Unlike stocks, which may not appreciate or pay a dividend, bonds offer stable, continual payments. And when a bond matures, typically your original investment amount is returned to you, assuming no defaults.

Portfolio diversification** — Bonds tend to rise when stocks fall and vice versa. Therefore, adding bonds to your portfolio can help even out the swings in its value.

What are the risks to owning bonds?

Historically lower levels of returns — Bonds are considered less risky than stocks, but with this lower risk comes generally lower returns.

Interest rates — Your bond’s income will stay the same as long as you own it, but its market value will vary. In general, bond prices and interest rates move in opposite directions. Rising rates can decrease the value of your bond, while falling rates can increase its value.

Higher interest rates can lower the value of your existing bond when compared to newer, higher-rate fixed-income investments. Conversely, falling rates could put your income at risk if your bond is reinvested at a lower rate.

Payment risks — There is a chance your bond issuer could default, meaning they would be unable to make payments on your bond. Some bonds also include provisions that allow the issuer to redeem the bond early.

What’s the right investment mix for you?

Whether you choose stocks, bonds or a mix of the two depends on several factors, including your:

• Long-term financial goals
• Comfort with risk
• Investing time horizon

Let’s use retirement as an example: You’ve spent years investing so you can retire on your terms. But as you shift from saving to spending, your investment mix may need to shift as well.

Growth still matters because inflation doesn’t retire. But you’ll also need investments designed to provide for your current income and give you more stability.

Your financial advisor can review your mix of stocks and bonds and the purpose for each within your portfolio. This can help you better navigate the market’s ups and downs and stick with your strategy over time.