Stocks have historically earned the highest returns over time. Stocks are basically a slice of ownership in a company that you can purchase. The value of that slice, or “share,” fluctuates with the value of the company. So if you own Apple stock, and Apple is doing well as a company, the value of your share in Apple will increase as the stock price rises.
Stocks have more short-term ups and downs in price than bonds. Because of this volatility, people generally plan to hold stocks as a long-term investment.
Bonds, on the other hand, are very similar to traditional individual loans. Just like individuals, companies and governments take out loans to invest in projects or to make large, essential purchases. Unlike individuals, companies and governments may take out these loans by asking the general public to lend them money in the form of a bond. Owning a bond is equivalent to owning a piece of a company or a government’s debt. In return, the company agrees to pay back the initial value of the bond plus interest, just as you might pay back interest on a car or home loan.
Bonds have historically earned lower returns, but they experience less ups and downs than stocks over the long term.
Figuring out your allocation of stocks vs bonds can be difficult. See how much your savings might grow in average, good, and bad times.