The myth
One of the major characteristics of stocks is their volatility, or how their prices can significantly change for and against your favor, in a short span of time. Their potential to grow rapidly, in particular, is something that many investors find attractive but on the flipside, their potential to slide is something others stay away from.
If you don’t fancy the up-and-down swings of the equities market but still look forward to a steady stream of income, you might want to read further.
While it’s true that bonds, notes, and bills aren’t likely to experience the same speed of growth, that doesn’t mean they’re not a viable investment option because they do offer investors some sense of stability.
The reality
When choosing assets for your portfolio, your goal should always be one of the primary considerations. After all, the investment products that you choose for growth won’t be the same as the ones that will give you money on a regular schedule. This just makes diversification a must for you to be able to get both.
If you invest in stocks, you’ll have to sell them to turn your paper profit into an actual profit when you want to use the money. Once you do that, you won’t be able to use them to earn more for you.
Of course, that’s fine if your goal was to have a certain amount by a specific date. If you’re able to acquire profitable blue chips, these can also give you regular income by way of dividends.
However, if your goal is to have a regular source of income that arrives on a predictable schedule, stocks may not be the best choice for you (despite their potential to increase in value quickly). Fixed-income instruments such as bonds would probably fit your needs better, even though they probably won’t change much in price.
The verdict: It depends.
Both stocks and bonds have unique advantages based on their characteristics, and your goal will help you see which one might match you best. Remember though that you don’t have to pick just one asset class to achieve your goal.
After all, if you have a growth portfolio, you can allocate part of it to bonds to reduce any volatility that it might experience. This is especially true if your time horizon is far away, since you’ll have longer to receive the coupons from your bonds.
If you’re after income, don’t rule out stocks. Your portfolio can also include shares from companies with a good history of giving out dividends. Real Estate Investment Trusts (REITs) in particular are required to distribute 90% of their unretained earnings to stockholders.
You can also consider putting your money in a balanced pooled fund. As the name suggests, such investment products try to achieve a balance between income and growth by including both stocks and bonds in their holdings. This way, you can rely on the fund manager to do the research and put in the time to figure out the right decisions.
.jpg)
