While many people have become optimistic about the economy, the stock market tells a very different story. Although we're not in a bear market yet, you'd be wise to begin preparing for one. Perhaps you already have or maybe you're trying to figure out whether corporate bonds or common shares would make the most sense.
What Are Corporate Bonds?
Let's begin here to make sure everyone is on the same page. Corporate bonds are fairly self-explanatory. They're just the types of bonds that corporations offer the market.
However, a lot of people don't know just how commonplace they are. They're actually the largest type of all bonds available.
How Risky Are Corporate Bonds?
It's also important to understand that, in many ways, these bonds don't function too much differently than stocks. This kind of distinction is important to make because if you think of them like government bonds, it's easy to immediately assume they're equally safe.
Well, they're not.
While they are, overall, generally a lot safer than stocks, you still need to do your research. You should reference Moody's and Standard and Poor's, at the very least. If you're truly serious about investing though, you should go several steps further to get a feeling for where the company is going in the near future.
Remember that if the company you buy a bond in goes bankrupt, there's a very real chance you won't see any returns whatsoever. If you're lucky in that situation, you might wind up with a fraction of what you started with.
Common Stocks Are Risky Too
That being said, you probably already know that common stocks are no sure bet either. As we mentioned at the beginning, many experts see a bear market on the horizon, meaning you'll want to reassess your portfolio very soon. You don't need to clean house, but you shouldn't take unnecessary losses either.
How Much Risk Can You Take?
The question you shouldn't be asking is, "Which one is riskier?" Instead, you should be asking, "How much risk can I handle?"
Ultimately, that's the one that will help you see the most returns.
If you're shy of risk at the moment-and again, remember the bear market that may be coming-it makes the most sense to go with bonds. You'll still want to do all that research though and diversify your portfolio.
On the other hand, if you're younger or just have the means to assume a bit more risk, then by all means, look into large well established dividend stocks or dividend ETFs. Don't become a cowboy, of course, but feel free to look where real opportunity may lie. However, many studies suggest that millennials are much more risk averse than baby boomers and, based on their risk tolerance, equity allocation should be somewhere between 40%- 60%.
The one really nice thing about corporate bonds is that, if the company that issued them makes it through a bear market, you should have nothing to worry about. If you buy stocks and the company fails, you've just lost that money. Even if they survive, it could be years and years before you're lucky enough just to break even on your initial investment.
In conclusion: start by considering the level of risk you're comfortable with and then do your research.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Additional disclosure:
IncomeClub is an online investment advisor, specializing in bond investing. Whether you are new to bonds or an experienced bond investor, we provide deep expertise in fixed-income investing, individualized advice, access to global bond markets, and convenient online account management.
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Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in loss. While bonds may provide an assurance of predictable return, there is a risk of default of particular issuer and there can be no assurance that an investment mix or any projected or actual performance will lead to the expected results shown or perform in any predictable manner.
Bonds are subject to interest rate, inflation, credit and default risk. The bond market is volatile. Investing in bonds in a raising rates environment, investors must be ready to see continually decreasing bonds prices and their recovering before maturity, and thus must be ready to keep bonds until maturity.
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