Advantages Bonds have over Stocks
For the new investor, stocks offer a heady broth of high returns, adrenalin pumping market swings and a chance to test their financial acumen – Not to mention the risk of being completely wiped out. As opposed to that, bonds are more of steady drip-drip-drip of income which offer a relatively safe haven for investments and require vastly lesser active management. When you buy a stock, you purchase equity, or a piece, of the issuing company. When you invest in a bond, you are basically underwriting the debt owned by the issuing organization, group or company. With a stock, the main intention is to see how high the stock climbs. With a bond, the overriding concern is to be sure that the bond issuer is good for the money.
When a company with both stocks and bonds in the market goes bankrupt, preference is given to bond holders to be able to recover at least part of their investment, while stock holders may see their entire investment go up in smoke, since they, as equity holders, are liable to bear the losses.
US treasury bonds are considered to be 100% risk free, since they are underwritten by the federal government, and the only reason these bonds could become worthless is if the US government reneges on their commitment to bond purchasers. This does not, of course, mean that all bonds are as safe. The millions lost in subprime mortgage bonds are but one example of how volatile markets and segments can affect even safe investments. Even states and countries occasionally go bankrupt, though they are more likely to be bailed out. These risky bonds are known as junk bonds, a discussion of which we may undertake in another article.
As is usually the case, a middle path is available to retirees who might see the steady gains from bonds as insufficient to cover a lifetime of costly health premiums and rising inflation. In this case, a savvy investment strategy involving a base portfolio of rock solid bonds which offer a risk-free and steady income along with an additional investment into the stock market might be a fruitful strategy. In the accumulation phase, an investor would be able to use the capital gains to fund more purchases, while keeping the principal intact. The bonds would provide an anchor to the minimum guaranteed returns, while the stocks would be useful to accumulate faster and build a bigger nest-egg, to be used for distribution at a later stage.
Please note that there are a number of strategies, alternate investment vehicles and retirement plans for retirees which not only offer capital gains along with tax benefits, but also an indirect means of investing in the financial markets. A comparison of the relative benefits of opting for a retirement plan as opposed to direct investments in stocks or bonds is beyond the scope of this article, due to the vast array of financial products for retirees, and their varying advantages and regulatory requirements. You are advised to consult your financial planner before you invest in stocks and bonds.