Stocks Vs Bonds For Your Retirement Investments

Conventional wisdom holds that stocks are usually riskier than bonds. So, why is that the perception, and is it true? There are differences between stocks and bonds. The fundamental difference is that a bond is set up to be a loan to a company. Stocks, however, represent an actual ownership share of the company.Since a bond is set up as a loan, one advantage to holding a bond is that when you buy it you know the income you will be getting. As an example, if you buy a bond with a 5% yield, it would usually pay a 2.5% dividend every 6 months. When you hold the bond until in matures, you will receive the face value as your final payment. You should remember that holding to final maturity may mean holding a bond for 20 to 30 years.

Now if you don't hold to maturity, risk will start to creep in. If you can't hold the bond to maturity you would have to sell it on the open bond market. There it will be sold at prevailing market interest rates. If interest rates have gone up since you originally purchased the bond, you will get back less than face value you paid for the bond. One other thing to avoid is a "callable" bond. With a callable bond, the company has the right to “call”, or cash out, your bond before it reaches its final maturity date. If interest rates had fallen since the time they issued the bond, the company will reissue the bond and pay less interest with the lower market rates.So with bonds you know what you'll get and when you will get it, but with a stock it's much more uncertain. For this reason most people consider stocks to be riskier than bonds. The flip side of this is that with a stock, you can make much more money, but you can lose much more money as well. Also, a good stock holding may pay dividends for many years, while with a bond after the final maturity date it will pay nothing.Making bonds a part of a retirement portfolio may be a good way to reduce the risk of your portfolio. With a "bond ladder", ( this is where you stagger the maturity dates of your bonds so that they don't all mature at once but instead mature in groups spaced over a period of years) is a great strategy to manage risk.You should keep on other thing in mind. Many average investors won't hold individual bonds, since it requires a fairly large initial investment. The average investor will often buy bond mutual funds for the fixed income part of their holdings. But bond funds act much differently with interest rate swings than an individual bond will. The difference is great enough that if you are holding bond mutual funds you may find that the statement that stocks are riskier than bonds may not always be true.