Stocks Or Bonds - What Should I Pick?

Summary: Stock investors and bond investors have too much to think about. Where are interest rates headed? Will the stock market rise or fall? Can investing in mutual funds save money and free up time? And, that eternal nagging question: Where to invest? This article answers some of these questions

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Where to invest? This question is stated just as it should be. Not 'what to buy (or sell)?'. Investing, true enough, is buying with the intention of selling for capital gains or reaping dividends in some form. But 'buying' is an activity carried out for consumption. Investment is undertaken to make a profit.

So, the question becomes, what will return the most profit for a given risk over a specified span of time? And, the sad but true answer is: no one knows.

Nevertheless, it is possible to judge the pros and cons and make moderately well-founded predictions based on history and current circumstances. So, here goes...

STOCKS

Dozens of thorough studies show that over a span of 10 years or more stocks in general will outperform any other investment. Historical returns averaging 12% per year are well-documented. No bond, real estate, commodity or other investment does so well, on average.

But there are two drawbacks to that position. Few investors want to buy a stock and hold it for 10, 20 or more years in order to be safely assured (to the degree that's possible) of seeing that return. Second, funds aside for the moment, individuals don't invest in 'stocks in general', they buy and sell a particular stock.

So, if stocks are attractive, consider a particular company's prospects over the time span you select. Technology, and other social and economic changes, eventually obsoletes every company. Except, of course, those that change with the times, eventually becoming an entirely different kind. General Electric no longer makes most of its revenue from selling light bulbs.

BONDS

Bonds, when well rated (AA or above) by one of the major agencies, return 4% or better with low risk and semi-annual interest payments. But assuming a modest 25% tax rate, the return is already down to 3%. Add the effect of even modest inflation at 2%, and the return is down to 1%. That doesn't even include the possibility of price depreciation for those who chose to sell prior to maturity.

Even so, bonds have advantages no other instrument enjoys. Since they have a set interest rate and maturity date, their behavior is much more readily predictable, given plausible assumptions about interest rate changes and other economic factors.

And many millions of skilled investors make substantial sums through bond investing. For those who can follow their lead, or carry out their own research, healthy profits are possible with modest risk.

COMMODITY TRADING or CURRENCY TRADING

Neither commodity investing nor forex investing is appropriate for the novice investor. Period. Though the situation is changing. See Funds below.

REAL ESTATE INVESTING

Real estate investing, either through actual property acquisition or paper investing (via Mortgage Backed Securities, ETFs - Exchange Traded Funds, IRAs - Individual Retirement Accounts - or other means) is a stellar way to make substantial gains. But, for all except those who simply occupy the property, it's a full time job.

STOCK FUNDS & BOND FUNDS

For those with limited time or temperament for research and investment tracking, funds offer an excellent alternative to direct investing. Mutual funds, one of the more common types, pool investor money and diversify investment (usually) into a variety of instruments: stocks, bonds, currency, commodities etc.

Investors save money by not incurring a fee for every trade, but pay management fees of one kind or another (usually annual), and those can eat substantially into overall returns. Check out each carefully.

It would be pleasant if the situation were simple. But, if it ever was it no longer is. As Einstein once said, "A theory should be as simple as possible, but not simpler."

On the upside, the research and advice available today is better than ever. With the Internet, individuals can investigate instruments at least to the degree that helps confirm or contradict recommendations made by advisers. (Including mine!)

Tread carefully at first, then be bold.