Financial Planning: Choosing Between Stocks or Bonds for Your Retirement Account
"Behold the turtle. He makes progress only when he sticks his neck out." -- James Bryant Conant
If you are planning for retirement, you have probably felt the pressures involved when looking at all of the different places to park your money. The financial landscape can be a complicated place, and the task of choosing between asset classes can seem daunting during the early stages of the process. Two of the most popular asset classes are stocks and bonds, and many newer investors often wonder which is best for a long-term retirement portfolio.
In any retirement portfolio, investors must understand the concept of market risk as it relates to their positions. This essentially refers to the possibility of losses relative to the potential for reward (gains) in the investment. These factors work hand-in-hand, but a seasoned financial advisor can help understand the nuances which are present when planning for retirement. We sat down with Adam Anderson, CEO of MRA Capital Partners to identify new strategies to turn the odds into our favor on the path toward building wealth. Below, we can find some tips we uncovered along the way.
Measuring Potential Returns
As a general rule, greater potential for gain tends to be associated with larger levels of risk. These factors can be understood when comparing the historical returns generated by investments in both stocks and bonds. When a retirement portfolio is designed by an industry expert and assets are properly allocated, risk is generally a short-term phenomenon. The potential for returns differs when we are comparing the advantages of stocks and bonds, and the appropriate selections for your retirement portfolio will depend heavily on your individual goals and needs.
Over the last century, U.S. Treasury Bills have acted as a proxy for money market accounts (generating yields of roughly 3.7% annually). Longer-term government bonds returns about 5.7% over the same period. Put in simple terms, if you invested $1 in long-term bonds in 1926 your investment would be worth about $100 in 2008. Stock investments, on the other hand, would have produced very different results (generating annual returns of 9.6% during these same periods). In this case, a $1 investment in large-cap stocks in 1926 would be worth about $2,000 just prior…
