Since the dawn of mankind, certain rivalries have shaped human civilization.
Their power struggles have violently ripped through the fabric of eons, causing the sun to rise in the west and set in the east, the oceans to run dry, and mountains to blow in the wind like leaves. Thus spake Mirri Maz Duur, noted economist.
Today we explore one of these ancient grudges in a segment we call:
Yes that’s right, my precious seekers of financial literacy. Once again, we’re going to break down two forms of investment and pit them against each other in a metaphorical battle for the soul of economic solvency!
Let’s meet our contenders!
The reigning champion: stocks
Stocks are basically little pieces of a company. They’re bought and sold on the stock market, and their worth and price rises and falls. Anyone can buy them—yes, even you, you bashful little wildflower!
If you own stocks, you’re technically a part owner of a company. You profit when the company profits and lose money when the company loses money.
When the company profits, the worth of your stocks rises. So if you sell those profitable stocks, you’ll have more money than you did when you bought them. Sweet, right? It gets sweeter: if you reinvest your stock profits—known as dividends—you’ll also earn interest on those profits in a cycle of increasing worth known as the power of compound interest.
Check out that amazing move!
All that said, stocks can be volatile in the short term. Like the violent whims of Poseidon, they fluctuate with the tides and the god-disrespecting actions of Homerian heroes. One day the stock market can be up, and the next it can drop, leaving you with less money than you started with.
To those of us with little money in the bank, this sounds heckin’ terrifying. Why would anybody spend money on stocks if there’s a possibility they could lose money? Sounds a lot like gambling… responsible, mature, very adult-like gambling.
But that risk is the cost of the ultimate reward of owning stocks: nice, fat returns on your investment over time.
The point of owning stocks is not to think in the short term. It’s to think in the long term. Because the stock market has historically always been on the rise. If there’s a depression or significant drop in stock value, the stock market will recover over the years.
In fact, the average stock investor can expect to see a 7%-10% compounding return on investment over their lifetime.
So when buying stocks, be like Odysseus returning from a road trip: you’ve got all the time (and wacky, god-fucking, sailor-killing opportunities) in the world.
The upstart challenger: bonds
Yes, you read that right. An organization built on the premise of making money needs to borrow some of yours. And while it may sound backwards, it’s actually a pretty sweet deal for Future You.
The company invests your bonds in their business and you’re paid back with a set amount interest. It’s a stable, predictable way to invest. Not nearly so risky as buying stocks.
But there’s a catch.
Bonds take time to mature. So they won’t be worth the full amount of the bond until they’ve fully matured.
This is why college savings bonds are a thing grandparents give to their newborn grandbabies. By the time that baby’s old enough to be freaking out about the prospect of student loans, the college savings bond their grandpappy bought them eighteen years earlier will come in super handy.
Note that you can cash out your bonds at any time before they mature if you’re absolutely desperate for money. You’ll get less than the full worth of the bond, but as a last resort, there are worse ideas. You can find out when your bonds mature by entering their identification numbers with the Treasury Department.
And the winner is…
Stocks! No, bonds! No, both!
Ok you know the drill, darling readers. Because as with most personal finance, the answer is personal and therefore depends on an individual’s personal situation.
For most of us, a healthy mix of both stocks and bonds is the way to go. Most financial experts advise splitting your investments between 10-30% bonds and the rest stocks during your twenties to forties. But is this a hard and fast rule?
To settle this highly nuanced grudge match once in for all, we turned to our sister from another mister, Dumpster Doggy, whose new course on beginner stock market investing contains all the information you need to know to make the right decision about how you split your stocks and bonds.
“Most millennials are going to want to consider an allocation that falls somewhere between 50/50 in stocks/bonds up to 95/5 in stocks/bonds. Exactly where you fall in this range should be determined by how comfortable you are with the stock market’s inevitable bat-shit-crazy swings,” Dumpster Doggy told me.
She went on, “It’s so interesting, because I think that a lot of times advisors start off with the question, ‘What’s your risk tolerance?’ Like I dunno motherfucker, ‘medium??’ That’s why I like to start with a hearty discussion about how different investment types behave, over the short-term and the long-term, and go from there. Like, there are only so many investment classes out there in the world. Let’s begin with a deep understanding of each. ”
What she said.
Investing in bonds is a very cautious way of investing, but it has a lower rate of return than stocks. So if you’re approaching retirement age and running down the clock on your investment returns, you might want to invest in more bonds than stocks. But if you’re young and have the advantage of years upon years for your investments to compound, stocks will give you more bang for your buck.
In Dumpster Doggy’s words: “The biggest risk over the long-term is not having enough money to live off of in retirement. Running out of moola. Therefore, the biggest risk you take with your retirement money is being too conservative, too soon. Coming full circle, this is why it is recommended that young people keep a majority of their long-term investments in stocks (using stock index funds), with bonds to act as a cushion. Exactly how much you keep in bonds will be determined by your comfort level being invested in stocks, knowing that they’re volatile.”
Don’t fear the volatility of stocks. And don’t scoff at the caution of bonds! Both have their place in your investment portfolio. Investing in both will build you a solid foundation for your retirement and financial future.
Really, the lesson here is…
If you enjoyed this vicious Investing Deathmatch and think it’s a weird yet wholesome way of learning about investing, read the whole series!
- Investing Deathmatch: Managed Funds vs. Index Funds
- Investing Deathmatch: Traditional IRA vs. Roth IRA
- Investing Deathmatch: Investing in the Stock Market vs. Just… Not
- Investing Deathmatch: Paying off Debt vs. Investing in the Stock Market
And if you’re interested in learning more about stocks and bonds from someone who actually knows what she’s talking about, we highly recommend taking Dumpster Doggy’s beginner course. It’s a glorious romp through everything you need to know to become a successful investor right heckin’ now and it’s run by one of our favorite feminist financial experts. Sign up now using the discount code BITCHES and you’ll get $30 off the course!