Stocks and bonds are the two main classes of assets investors use in their retirement and financial portfolios. Stocks represent an ownership share in a company. The total return is usually by growth of the stock price and also if the stock pays a dividend. Bonds represent a loan made to a company or a government organization. It is a debt security in which the issuer owes the holder of the bond a promise to pay interest on the bond and to pay back the principal at maturity.

Stocks are considered higher risk than bonds but have more growth opportunities also. For someone who does not need money or income now but wants growth, they should invest more in stocks. Someone who is younger and has many years to retirement, they should invest more in stocks. A rule of thumb is the longer time you have to invest the more risk you can take. Bonds are usually lower risk and not as volatile as stocks. Bonds are good for someone who doesn’t want to take as much risk as stocks. They would be good for someone who is closer to retirement and does not have as much time to let their money sit there and grow . They might seek a reliable and stable income from their investments and do not want to worry about a large stock market loss that could ruin their retirement. An investment portfolio that is mostly stocks would be considered very aggressive with the most risk of stock market loss. A portfolio of mostly bonds would be considered very conservative with low risk and less chance of a loss of money. A balanced portfolio of stock and bonds (50% stock and 50% bonds) would be moderate risk with a moderate chance of loss of money. There are many different types of stocks and bonds to choose from so if you’re not sure what you are doing it would be wise to talk to a knowledgeable financial advisor.

When investing in stocks and bonds the first thing that you should do is review your financial situation and look at what financial goals you are trying to accomplish.

Here are questions you should consider before choosing a portfolio of stocks and bonds:

  • Age and Health

  • Annual Income and Net Worth

  • Time Horizon of Investments

  • Investment Experience

  • Risk Tolerance

  • Tax Rate

  • All Current Investments, Retirement and Non-Retirement

  • Liquidity Needs

  • Beneficiaries and Special Needs

  • Financial Goals

Only after a complete Financial Needs Analysis, can you start to develop a portfolio of stocks and bonds to accomplish your goals.