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Finance: What are the Return Dynamics of Investing in Stocks v. Bonds? 137 Views
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Description:
There’s an old saying on Wall Street: People who want to make a lot of money buy stocks. People who have a lot of money buy bonds. The amount of wealth invested in bonds vs. stocks roughly 4:1. The risk vs. reward ratio is more on the stock side, which can be volatile, and can lose principal, but historically has been shown to be more profitable over the long haul than bonds. However, bonds offer greater security of principal, lower volatility, and reliable income, which makes for easier estate planning and fewer sleepless nights.
- Social Studies / Finance
- Finance / Financial Responsibility
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
- Terms and Concepts / Bonds
- Terms and Concepts / Index Funds
- Terms and Concepts / Investing
- Terms and Concepts / Managed Funds
- Terms and Concepts / Mutual Funds
- Terms and Concepts / Stocks
- College and Career / Personal Finance
- Courses / Finance Concepts
Transcript
- 00:00
finance a la shmoop what are the return dynamics of investing in stocks versus
- 00:07
bonds well here's risk yeah and here's reward
- 00:12
take more of this and you get more of this but also this right stocks yeah [Man performs bike jump and holds trophy]
- 00:19
they're risky while they're risky in the short run
- 00:22
anyway here's a chart of the S&P 500 since the late 19th century Peaks
Full Transcript
- 00:26
valleys Peaks valleys Peaks valleys it goes up a lot and down a lot but over
- 00:31
time it goes up a lot in fact over time the stock market has gone up by about 10
- 00:36
percent a year give or take and yeah there were long periods of time where [Man throws money into the air]
- 00:40
the market did way better than 10% and long periods where it did way worse and
- 00:44
don't forget you have to include dividend and dividend reinvestment when
- 00:48
you do these calculations all right so you can't invest in the stock market [Man giving lecture on stocks]
- 00:51
with a short term view really it's like navigating a ship with a magnifying
- 00:55
glass instead of a telescope if you're gonna take on the risk of the stock
- 00:59
market well you mitigate a lot of that risk by
- 01:02
just committing to own your basket of stocks for a very long time if you do
- 01:07
and history continues to repeat itself like a bad Thai food dinner well then [Person in a restroom cubicle]
- 01:12
you'll double your money about every 7 or 8 or 9 years something like that got
- 01:16
it okay the bond markets a completely different animal here our yields in the
- 01:20
early 1900's and here our yields around world war two and here our yields around
- 01:25
the 70s well note the skyrocketing numbers here is the Jimmy Carter [Interest rate history graph]
- 01:29
Administration tried hard to fight and then stomp out inflation and they did
- 01:35
but oh the price anyway and since then bonds have been on a long slow ride down
- 01:40
to the modern era where yields are almost nothing it's unprecedented to [A 100 dollar bill on the floor]
- 01:45
have such quote free money unquote but that's where we live in the world today
- 01:49
with government's desperate to stimulate inflation so that they can pay off their [Football being pumped up]
- 01:53
fixed debts easier so over the decades bond yields have come down and today the
- 01:58
ten-year t-bill yields about two or three percent depending on the weak you're
- 02:03
looking at it and corporate bonds yield modestly more because they're modestly more risky
- 02:08
they're yielding about four or five percent they're way safer both of these [A team of people waving]
- 02:12
then similar stocks that is government bonds and corporate bonds way way safer
- 02:17
than stocks less risk so what would you expect you know less reward and yeah cuz
- 02:23
bonds basically just boringly payoff only a very small handful of [Pennies drop]
- 02:27
bonds as a percentage of the total out there ever lose money by not paying
- 02:32
their full interest and their full principal generally on time where stocks
- 02:36
lose money all the time so that's it more risk more reward so if you've got [Person stacking poker chips]
- 02:41
lots of time with your investments put it in the stock market it's gonna go up
- 02:45
at a much higher rate than the bond market but if you're thinking about
- 02:48
buying a house in eighteen months well you probably can't afford the market
- 02:52
risk so you know sit tight [Man standing outside of a house for sale]
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