Which Is the Better Investment for Retirement: Stocks or Bonds?

Which is, indeed, the better investment of these two securities: stocks or bonds? Both are securities that provide for rewards in the form of profit and offer risks through the possibility of loss that newbie and veteran investors alike must take into account. Thus, both securities seem just as appropriate for an individual planning his retirement.

But before you even think about putting a portion of your retirement fund into either one of these market securities, you are well-advised to educate yourself about them. A fool and his money will soon part ways in the market and you don't want to be that fool either. So, read on and find out which one of these two securities are right up your investment alley: stocks or bonds?

Stocks Or Bonds - First Lets Talk Stocks

Shares of stocks, or simply stocks, represent the ownership of the investor in the issuing company. These are traded over stock exchanges like the New York Stock Exchange although you must open an online account with a stock brokerage firm to participate in such trades nowadays.

Studies have shown that stocks outperform all other forms of investments within a 10-year period. Returns have reached as high as 12% per year, which bonds will be hard-pressed to equal with their 5.4% average annual gains since the 1920s. Stocks also did not lose any significant ground in any 20-year period and despite the current economic recession.

With such good returns on investment, stocks also provide for the greatest opportunity to beat inflation over the long-term period. You can keep well-paying stocks in your portfolio for a number of years whilst being largely immune to the effects of inflation.

Before you jump to conclusions in the stocks or bonds issue, you should know the risks of stocks in your retirement portfolio. Stocks have greater risks for losses in the short-term period than bonds. Thus, you must avoid investing in large chunks of cash on these securities if you intend to use the money within 5 years.

Stocks Or Bonds - Now Lets Talk Bonds

Bonds are just fancy IOUs issued by either private corporations or public entities to finance their various programs and projects from current operations to future infrastructure projects. These securities come with a principal amount and an interest rate that the bond issuer promises to pay after a certain period of time (maturity).

The stocks or bonds issue has a similarity: Both are rated according to the safety of investments. Thus, the safest stocks to invest in are the blue-chips stocks while the safest bonds are rated AAA.

These ratings are useful in determining whether you should choose one stock over another or one bond over another or a stock over a bond. Look at the classification and go for the safest one, if and when you don't want to take chances with your retirement fund with a toss-coin process over the stocks or bonds issue.

Bonds are one of the safest investments especially when rated AAA because you are assured of recouping your principal investment along with a tidy profit on the coupon rate. But there are risks, too, including the risks of inflation, credit and interest rate.

So, this brings us yet again to the question: Which is the better investment for your retirement portfolio: stocks or bonds? Well, we suggest a diversified portfolio, which means that both securities should be present albeit in differing percentages. But that's for another discussion.