Finance: What are the Return Dynamics of Investing in Stocks v. Bonds?

There’s an old saying on Wall Street: People who want to make a lot of money buy stocks. People who have a lot of money buy bonds. The amount of wealth invested in bonds vs. stocks roughly 4:1. The risk vs. reward ratio is more on the stock side, which can be volatile, and can lose principal, but historically has been shown to be more profitable over the long haul than bonds. However, bonds offer greater security of principal, lower volatility, and reliable income, which makes for easier estate planning and fewer sleepless nights.

College and CareerPersonal Finance
CoursesFinance Concepts
FinanceFinance Definitions
Financial Responsibility
Personal Finance
Finance and EconomicsTerms and Concepts
LanguageEnglish Language
Life SkillsFinance Definitions
Personal Finance
SubjectsFinance and Economics
Terms and ConceptsBonds
Index Funds
Investing
Managed Funds
Mutual Funds
Stocks

Transcript

00:26

valleys Peaks valleys Peaks valleys it goes up a lot and down a lot but over

00:31

time it goes up a lot in fact over time the stock market has gone up by about 10

00:36

percent a year give or take and yeah there were long periods of time where [Man throws money into the air]

00:40

the market did way better than 10% and long periods where it did way worse and

00:44

don't forget you have to include dividend and dividend reinvestment when

00:48

you do these calculations all right so you can't invest in the stock market [Man giving lecture on stocks]

00:51

with a short term view really it's like navigating a ship with a magnifying

00:55

glass instead of a telescope if you're gonna take on the risk of the stock

00:59

market well you mitigate a lot of that risk by

01:02

just committing to own your basket of stocks for a very long time if you do

01:07

and history continues to repeat itself like a bad Thai food dinner well then [Person in a restroom cubicle]

01:12

you'll double your money about every 7 or 8 or 9 years something like that got

01:16

it okay the bond markets a completely different animal here our yields in the

01:20

early 1900's and here our yields around world war two and here our yields around

01:25

the 70s well note the skyrocketing numbers here is the Jimmy Carter [Interest rate history graph]

01:29

Administration tried hard to fight and then stomp out inflation and they did

01:35

but oh the price anyway and since then bonds have been on a long slow ride down

01:40

to the modern era where yields are almost nothing it's unprecedented to [A 100 dollar bill on the floor]

01:45

have such quote free money unquote but that's where we live in the world today

01:49

with government's desperate to stimulate inflation so that they can pay off their [Football being pumped up]

01:53

fixed debts easier so over the decades bond yields have come down and today the

01:58

ten-year t-bill yields about two or three percent depending on the weak you're

02:03

looking at it and corporate bonds yield modestly more because they're modestly more risky

02:08

they're yielding about four or five percent they're way safer both of these [A team of people waving]

02:12

then similar stocks that is government bonds and corporate bonds way way safer

02:17

than stocks less risk so what would you expect you know less reward and yeah cuz

02:23

bonds basically just boringly payoff only a very small handful of [Pennies drop]

02:27

bonds as a percentage of the total out there ever lose money by not paying

02:32

their full interest and their full principal generally on time where stocks

02:36

lose money all the time so that's it more risk more reward so if you've got [Person stacking poker chips]

02:41

lots of time with your investments put it in the stock market it's gonna go up

02:45

at a much higher rate than the bond market but if you're thinking about

02:48

buying a house in eighteen months well you probably can't afford the market

02:52

risk so you know sit tight [Man standing outside of a house for sale]