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Finance

Should I Buy Bonds or Stocks Now? Risks, Asset Allocation Explained

Over the last few years, several new asset classes, especially cryptocurrencies, have gained traction. Historically, bonds, stocks, and real estate have been the most popular assets. Many investors want to know if they should invest in bonds or stocks now. What are the risk and return payoffs of investing in stocks and bonds and what role does asset allocation play?

First, let’s understand the difference between stocks and bonds. Bonds can be issued by either public or private institutions. Whenever a company needs cash, it can either do so by selling shares or raising a loan. Buying stock gives you an ownership stake in the company. However, as bondholders, you have the first right to the company’s assets.

Are bonds or stocks riskier?

Bonds are considered a safe investment, but they aren’t risk-free. First, you take the credit risk when you buy the bond. The bond’s credit rating is a good framework to understand the risk. Lower-rated bonds have higher credit risk and vice versa.

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Even if you buy the highest-rated bonds, you are subject to interest rate risks. The price of bonds moves inversely to the interest rates and bonds tend to fall in a rising interest rate environment. Rising inflation and fears of a rate hike led to a rise in bond yields and bonds turned negative for the year.

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Meanwhile, one apparent risk of investing in bonds is that over the long term, your returns would be lower than that of the stock markets. There have been instances where returns from bonds have even been lower than the inflation rate. Berkshire Hathaway chairman Warren Buffett hates bonds for a reason.


View more information: https://marketrealist.com/p/should-i-buy-bonds-or-stocks-now/

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