Stock Versus Bonds

A lot of investors may wonder if they should have invested in
stocks or bonds or both Both investment vehicles have their own
merit in the investment world However, the best investment
choice depends on your investment horizon and your risk
tolerance
Bond is a certificate of debt issued by governments or
corporations which will be repaid later at maturity Bond
investors get steady stream of interest while the principal will
be paid at maturity Currently, the ten year treasury bond yield
448 % This guarantees investors that held the bond to
maturity, an annual 448 % return on investment assuming a
default risk of 0 Since treasury bond is backed by the United
States government, it is safe to say that the default risk is
nil Treasury bond price fluctuates daily But the potential
capital gain from the price change is fairly minimal As of
Tuesday December 6th 2005, the 10 year treasury bond is priced
at around par value of $ 100 Therefore, the investors’ main
return on investment is through the interest payment of the bond
When investing in common stock, investors may be rewarded with
either dividend payment or capital appreciation or both Mainly,
investors are aiming for capital appreciation profit when they
invest in stocks Historically, stock market indices has
returned 105% since world war II Stock investors may be
exposed to a lot of risk due to the price volatility When the
company is doing poorly, investors may lose half or all of his
principal Bond investors do not have this problem if the debt
issuer still survives
In my opinion, investors are well served investing in stocks if
they will not use the savings for more than five years The
reason is simple Common stock gives a much larger return than
bond Investing in bond merely get you even with inflation Some
common stock can even give you that kind of return from dividend
alone If stock investors properly calculated the fair value of
the common stock, the short-term volatility of stock will not
matter In the long run, stock will be traded close to their
fair value
There is no need for investors with five year investing horizon
to avoid common stocks While investing in treasury bond is
theoretically safe, its return barely match inflation In other
words, investing in treasury bond will not make us richer

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