SHARETIPSINFO >> Articles Directory >>How should you split your investment portfolio between stocks and bonds?


There is a common dilemma among the investors all over the world about their asset allocation between stocks and bonds. In simple terms the investors find it difficult to decide how much asset they should invest in the stocks and how much in the bonds. Here we are trying to resolve this eternal dilemma of the investors by providing a comprehensive overview of both the world – stocks and bonds and by presenting to them all the aspects that they need to consider while taking decision about asset allocation between stocks and bonds. But before we do that we have to discuss what are basically stocks and bonds and what are the differences between them?

Stocks or equities are partial ownership of a company. In fact by buying the stocks of a company you become the shareholder of the company that means you are a part owner of the corporation. If the company makes profit and price of the stock is appreciated at the stock market for any other reason, you make a profit on your investment. On the other hand if the company does badly or in the worst case if the company goes bankrupt – you make loss in the investment.

On the other hand bonds are type of loan that you give to a corporation or Government and earn a predefined interest on that for a stipulated time period. After that time period you get the initial investment back. In case of bonds if the corporation gets bankrupt, you of course loose on the interest but then gets back your initial investment as the assets of the company is divided. One more point you need to remember in this context and that is the return to the bond holders are paid well before the share holders get their return when the company has gone bankrupt.

From this clarification it is quite evident that bonds are safer investment option than the stocks. But if you consider return from your investment stock is way ahead of the bond. While you can increase about 12% on an average from your stock market investment, a short term Government can earn you as much as 5% of your investment. So the logic is simple if you prefer security over return bonds should be your choice and if you are looking forward to get a good return over a period of time – stocks should be your first preference. But the question of asset allocation comes into play when you are looking forward to divide your investment portfolio between bonds and stocks in such a way that you get the maximum benefits of both the worlds. You have to strike that magic formula that will provide you optimum security as well as give you maximum return.

If you go through different articles about asset allocation in most of them you will find that experts have suggested for dividing your asset in 60:40 between stocks and bonds. That means they have suggested for investing 60% of your asset in the stock market and 40% of your asset in bonds. But that is a common solution and may not suit every investor. There is another factor that comes into consideration while deciding about the asset allocation – that is the age of the investor. There is one principle that covers this aspect as well. According this method you should deduct your present age from 100 and the result should be the percentage of asset that you can invest in stock market. For example, you are 30 years old at this moment you can invest (100 – 30 = 70) 70% of your asset in the stock market. The logic behind this principle is that the stock market moves in a cyclic trend of ups and downs and hence a younger investor will have more chance to take advantage of swings at the stock market if compared to an older investor.

All said and done, you must always remember that every investor has unique objectives in mind when they are coming to financial market. Therefore, you should personally decide what your priorities are and how much risk you are ready to withstand, before you come to the decision about asset allocation between stock and bonds.


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