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Money Talks: Stocks or Bonds? What's the Difference?

Depending on where you are in your retirement plan, where should you be investing your money?

TEMPLE, Texas — What's the difference between stocks and bonds? We hear all the time that these are the investments that people make when saving for retirement. But it could be time for a little brush up.

The main difference between stocks and bonds is that stocks give you partial ownership in a corporation, while bonds are a loan from you to a company or government. 

Certified Financial Planner Neil Vannoy discussed the difference on this week's Money Talks.

“Investors balance risk and reward in their investment portfolios through asset allocation. The three primary asset classes are cash, bonds, and stocks, but there are many subcategories within each class. For example, in the bond category there are government bonds, corporate bonds, municipal bonds and so on. And for stocks investors can choose between large-, mid- or small-sized companies, international or domestic companies, and many other types of stocks."

It's always nice to have cash on hand, but remember, cash doesn't make you money, bonds do, but it will tie up a percentage of your cash. 

"Bonds offer a little more return potential than cash in exchange for a small amount of volatility from day-to-day," Vannoy elaborated. "But keep in mind that bonds can be very volatile in response to interest rate changes and other factors like we saw in 2022. Stocks tend to be much more volatile than bonds but offer much greater return potential."

As you get closer to retirement, more and more of your investments should be moving into bonds, but remember, the return isn't great.

“The percentage of your portfolio that you hold in bonds vs. Cash will affect the amount of volatility and future return potential you can expect," Vannoy said, "So make sure to research how you should divide your investments based on your age, risk tolerance, and time horizon. Younger investors tend to hold more of their assets in stocks for higher return potential since they have a longer time horizon."

Investors, you have to be smart and wary of down years for the market so one has to consider inflation, and how to stay in front of it.

“It's often a good idea to move more money into bonds and cash as you approach the time you'll need your money," Vannoy said. "Retired investors will still need growth in their portfolio to outpace inflation over time, so don't move all your money out of stocks just because you're approaching retirement age. You can use an all-in-one mutual fund or ETF to get exposure to stocks and bonds, or choose to hold each type of investment separately. For example, target-date retirement funds are an easy way to get a diversified portfolio of stocks and bonds. Personally, I prefer to use individual holdings so I can customize my stock and bond exposure."

And a reminder that stocks typically trade on various exchanges, while bonds are mainly sold over the counter rather than in a centralized location.

In the United States, the prominent stock exchanges include Nasdaq and the New York stock exchange (NYSE).

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