How Bonds and Stocks Balance Your Portfolio

Learning how to balance investments on both sides of the spectrum is another step towards attaining one’s financial goals.

There are different types of investment securities and they all serve their different purposes. While the stock market gives you the opportunity to buy into a myriad of strong organizations in the economy you exist in, other investment instruments serve their own purposes.

One of such is the bonds market and the opportunity it offers for the investor who does not want to be burdened by the volatility that the stock market poses at least in the short run.

The purposes they serve are different and, consequently, the only thing that changes is the degree to which individuals or investors choose to allocate their funds.

More so, key areas like the investors’ age, level of risk tolerance, and the available capital requirement are some of the things that determine how people choose to allocate their finances.

Both stocks and bonds exist on the equity – debt investment spectrum and companies typically depend on a combination of both volatile investments that yield high returns as well as relatively safe investments that don’t yield so much.

Learning how to balance investments on both sides of the spectrum is another step towards attaining one’s financial goals.

Balancing your investment portfolio with both

There are a few clear differences between stocks and bonds as well as what they do to your investment portfolios. The first lies in the form. With stocks, you are not just investing in a company but are bidding for these stocks alongside a series of other investors and basically moving with the forces of demand and supply.

It is this constantly changing point that makes the security very volatile. Because the market moves based on the actions of investors, emotional investing based on fear or greed could impact trade.

Interestingly, the price the stock being traded might not even be the real value of the stock. There are certain companies undervalued and there are others that have incredibly high valuations, nothing close to the real value.

With bonds, a lot is different. There are different forms of bonds and they include sovereign bonds which are issued by nations, municipal bonds which are issued by municipalities, and corporate bonds which are issued by corporations.

These companies or governments borrow from investors at a fixed rate with a fixed time period. They are typically less volatile than stocks.

While they could have their own risks and could fluctuate sometimes, they are generally safer than stocks and this is because they face different risks and respond differently to market movements. There is also the risk of low interest rates.

The way both of them work is that they balance out the volatility. When you properly optimize both, investors have the opportunity to reduce the risks especially in uncertain economic periods.

The percentage structure on how you allocate both securities it, however, is what will define the results you achieve.

Written by Lawretta Egba.