Stocks or bonds? Which investment is right for you? The answer to this question depends on your age, risk tolerance, and long term goals.
Stocks vs Bonds: Which Performs Better Over the Long Run?
In general, stocks outperform bonds over the long term but bonds provide safe income with much less volatility. According to Zacks.com, stock have greatly outperformed bonds over the last 100 years.
Over roughly the past 100 years, they've shown an annual return of about 10 percent per year. By contrast, long-term government bonds have returned between 5 and 6 percent.Source: Zacks.com
However, long term bonds have outperfomed the S&P 500 returns over the last 20 years.
The total return for VBLTX from 1999 – 2019 was 272% versus only 210% for SPY. While VBLTX’s outperformance is surprising, what’s even more surprising is the magnitude of the outperformance of 62%.Source: FinancialSamurai.com
Of course, the S&P represents the overall American stock market but doesn't account for massive gains in individual stocks like Apple and Amazon.
Invest in stocks for the best long term gains but be sure to do your research before investing. You may underperform the market and could be better off investing in a simple index fund or ETF mix.
Determine Your Ideal Stock & Bond Allocation
The general rule is to invest heavily in stocks during your younger years then slowly adjust your allocation to favor bonds as you age. Here's a good chart showing your potential allocation by age:
If you invest in index funds, you can adjust your portfolio over the years by buying into these cheap funds:
- For stocks: Fidelity Zero Total Stock Market Fund (FZROX)
- For bonds: Fidelity Long Term Treasury Bond Index (FNBGX)
If you want to purchase stocks, simply add a Bond index fund like FNBGX to take care of your bold allocation.
What is My Personal Stock vs Bond Allocation?
I'm 33 years old and I personally invest in 99% stocks and 1% bonds. The chart above is for an untra-conserative investor but I prefer a more aggressive portfolio model since I'm at least 7 years away from retirement (retiring at 40 is my goal).
I invest in individual stocks as well as Fidelity Zero Fee Index funds to make up the bulk of my stock market investments.