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Stocks vs. Bonds: Explaining Long-Term Investing to Clients

Investment advice is everywhere.

On television, market experts debate what is hot and what is not. Websites that evaluate economic conditions and recommend taking a position in one investment or another abound on the internet. Neighbors and colleagues are happy to share their market insights.

Savvy investors, however, rely on advisors or wealth managers for sound guidance on creating a balanced, diversified portfolio that can grow money through economic cycles and bull and bear markets. To do that, an advisor typically recommends assembling a mix of cash, stocks and bonds in a portfolio that matches the client’s tolerance for risk.

What Is the Difference Between Stocks and Bonds?

Most simply put, stocks are an equity investment in the form of shares in a company or a mutual fund. Thus, the shares constitute investors’ part-ownership stake in the issuing enterprise.

Bonds, on the other hand, are a loan contract. Investing in a bond essentially is lending money to the issuer — a government agency or private enterprise that is borrowing to raise capital — on the promise the borrower will pay interest over the life of the contract and return the principle when it expires.

“While both instruments seek to grow your money, the way they do it and the returns they offer are very different,” the NerdWallet guide for beginning investors explains.

What Are the Risks and Returns on Stocks vs. Bonds?

Stocks and bonds are often combined in a portfolio to balance with the investor’s risk tolerance.

For instance, a younger investor, planning a retirement portfolio that will go untouched for a decade or longer, might weight the portfolio toward stocks, which have a higher risk — short-term market volatility has a shock-and-awe quality — but produce higher returns over the long run.

According to a Business Insider report on analyses by international investment bank Goldman Sachs, the average stock market return from 2019 to 2020 was 9.2%, with the S&P returning 13.6% annually. The magazine noted: “The average return looks very different annually, but holding onto investments over time can help.”

Investors closer to retirement, on the other hand, likely have a lower tolerance for risk. Nearing the end of one’s earning career, a balanced portfolio weighted toward bonds usually produces a steadier income stream and shelters the portfolio from the impact of stock market fluctuations. Playing it safe, though, means a smaller return: long-term government bonds, for instance, returned between 5% and 6% since 1926, according to the investment research firm Morningstar.

Why Is Investing so Complicated?

The investment website The Motley Fool lists 16 different types of stocks, each with their investing profile: common vs. preferred; large-, mid-and small-cap; international and domestic; growth, value, IPO; stocks that pay dividends and those that do not. The list goes on.

Similarly, a quick internet search finds that some websites say there are four types of bonds, others five and still others seven. Among them are Treasury savings, agency, municipal and corporate bonds. In addition, there are GSE bonds, investment-grade bonds, high-yield bonds. It is safe to say that investors have a multitude of options when considering buying stocks or bonds.

What Does It Take to Become an Investment Professional?

More and more, businesspeople are obtaining a Master of Business Administration (MBA) focused on Finance, such as that offered by the University of Chicago Illinois (UIC), to acquire specific expertise in applying data and analysis in the management of funds, portfolios and investments.

Instruction in the program is identical to the on-campus curriculum at the university’s Liautaud Graduate School, which is accredited by the Association to Advance Collegiate Schools of Business (AACSB International). Similarly, the same award-winning faculty guides students in online courses as those held in Chicago. Graduates of the program gain well-rounded knowledge in critical areas such as:

  • Investment analysis
  • Capital structure in corporate finance
  • Evaluation and quantification of fixed-income securities

Faculty for UIC’s MBA in Finance curriculum help students apply real-world scenarios and market data to their studies, ultimately preparing students for market unpredictability. Individuals can use a reliable and solid foundation in business education to make investment decisions for themselves at any stage of life.

Learn more about the University of Illinois Chicago’s Master of Business Administration with a concentration in Finance online program.

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