In Finance 101, you learn that the capital market is broken down in two kinds of investment products: stocks and bonds. Bonds deliver fixed returns, while stocks deliver variable returns. Then everyone asks: ‘Great. Then which one offers the highest returns?’. It is a fair question. You invest money because you want to make some more.
Professionals agree on saying that stocks outperform bonds on the long run. If it is sure that stocks will outperform bonds, why do we bother with bonds? The problem is that nobody agrees on assessing what is ‘the long run’.
Time is key. If you need to cash out soon, you will not be able to handle short-term volatility. You want your money to be safe and you want to know how much you will have at a specific moment.
When you invest on a longer term, you can handle more risk. Investing in stocks does not enable to determine how much you will get when you will have to cash out. You may get better returns but nothing is sure.
The difference between bonds and stocks is not technical. What matter are the time you have and your ability to handle emotions.
1. Bond owners buy stability. They do not want too much change, since change means more risk.
2. Stockholders buy hope. They expect growth of the company and an increase of dividends.