Stocks vs Bonds

Our Verdict: Stocks offer higher long-term returns but more volatility. Bonds provide stability and income. Most investors need both. Young investors should lean toward stocks; retirees toward bonds.

Stocks

Bonds

In-Depth Analysis

Stocks and bonds are the two foundational building blocks of virtually every portfolio — and the ratio between them is arguably the most important investment decision you'll make. The stock/bond split determines your expected return, your maximum drawdown during crashes, and your ability to stay invested through volatility. Get this right, and asset selection matters relatively little. Get it wrong, and even perfectly chosen investments won't save you from panic-selling at the bottom.

The historical numbers are clear but context-dependent. Since 1928, US stocks have returned approximately 10% annually (7% after inflation). US bonds have returned approximately 4–5% annually (2% after inflation). A 60/40 stock/bond portfolio has historically returned about 8% annually with significantly lower volatility than an all-stock portfolio. During the 2008 financial crisis, a 100% stock portfolio lost 37%; a 60/40 portfolio lost only 22% and recovered in about 2 years versus 4–5 years for pure equities. The bond allocation doesn't just reduce returns arithmetically — it reduces the depth and duration of drawdowns, which is enormously valuable for investor behavior.

The correlation between stocks and bonds is the critical variable. Traditionally, bonds have been negatively correlated with stocks — when stocks fall (risk-off), investors flee to bonds, pushing bond prices up. This negative correlation made the 60/40 portfolio the cornerstone of institutional investing. But in 2022, both stocks and bonds fell simultaneously (-18% stocks, -13% bonds) because rising inflation and interest rates devastated both asset classes. This correlation breakdown reminded investors that the stock/bond relationship is not guaranteed — particularly in inflationary environments.

Age-based allocation rules exist because the stakes change as you near retirement. A 30-year-old who loses 40% of their portfolio can wait decades for recovery. A 65-year-old drawing down assets cannot — sequence of returns risk means a severe market drop in early retirement can permanently impair the portfolio. The classic "110 minus your age" in bonds (someone aged 35 holds 75% stocks, 25% bonds) provides a starting framework. Target-date funds automate this "glide path," shifting from aggressive to conservative allocations over time. Individual investors should choose a stock/bond ratio based on their specific time horizon, income stability, and psychological tolerance for watching their balance fall.