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It's an investing axiom that
stocks return more than bonds. In the past, this has generally been true for
time periods of at least 10 years or more. However, this doesn't mean you
shouldn't invest in bonds. Bonds are appropriate any time you cannot
tolerate the short-term volatility of the stock market. Take two situations
where this may be true:
1) Retirement
The easiest example to think of is an individual living off a fixed income.
A retiree simply cannot afford to lose his/her principal as income for it is
required to pay the bills.
2) Shorter time horizons
Say a young executive is planning to go back for an MBA in three years. It's
true that the stock market provides the opportunity for higher growth, which
is why his/her retirement fund is mostly in stocks, but the executive cannot
afford to take the chance of losing the money going towards his/her
education. Because money is needed for a specific purpose in the relatively
near future, fixed-income securities are likely the best investment.
These two examples are clear cut, and they don't represent all investors.
Most personal financial advisors advocate maintaining a diversified
portfolio and changing the weightings of asset classes throughout your life.
For example, in your 20s and 30s a majority of wealth should be in equities.
In your 40s and 50s the percentages shift out of stocks into bonds until
retirement, when a majority of your investments should be in the form of
fixed income.
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