Should I Buy Stocks or Bonds Right Now?

japanese candlesticks stocks bonds balance pen pencil — (Image credit: Getty Images)

Investors wondering should I buy stocks or should I buy bonds right now need to balance the need for growth with a need for stability.

Generally, stocks are a good way to increase the value of your retirement savings because they can appreciate significantly over time.

However, that growth potential is offset by the potential that you might lose a significant amount of money if things go poorly on Wall Street.

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On the other hand, bonds are incredibly stable and a great way to protect your money. That defensive approach comes with its own risks, however.

A number of studies show that roughly half of all Americans don’t have a penny saved for retirement, so a focus on protecting an insufficient nest egg instead of growth could mean a significant financial shortfall down the road.

Here’s more detail on the risks and rewards of both stocks and bonds and the place that each asset has in the typical investment portfolio.

Should I buy stocks right now?

In the long run, the stock market almost always trends higher.

One popular data set shows U.S. stocks have only experienced three periods of negative performance over 10-year periods since 1914, including some rough years during the Great Depression in the 1930s and the Global Financial crisis of 2008-09.

But these periods were short-lived, and the market quickly bounced back – including a phenomenal 26% year for the S&P 500 in 2009 right after the market lows the year before.

And data provided by the Stern School of Business at NYU estimates a median return of 15% annually for the S&P since 1928.

As the old saying goes, past performance is not a guarantee of future returns. But that’s pretty powerful evidence. And it should provide comfort for long-term investors when the stock market has a bad month or even a bad year.

Selling when the market is at its worst locks in losses and causes you to sit out the inevitable rebound, and most Wall Street experts caution against knee-jerk trades in response to volatility.

History is replete with troubled times for financial markets, and it's littered with once-iconic companies toppled by mismanagement or scandal.

But, if you’re investing in a diversified portfolio of stocks instead of just a few names, inevitable bumps in the road are usually easily absorbed.

So, when should you buy stocks? In short, it’s always a good time to buy stocks.

Long-term returns are significant. And many investors who are behind on their retirement planning will need to focus on growth to catch up.

Buying stocks is an effective way to achieve that goal.

Should I buy bonds right now?

Whether or not to buy bonds now is a bit more complicated.

While bonds are generally lower risk than stocks, at least when it comes to the potential of principal declines, they do come with challenges of their own.

Bonds – particularly rock-solid U.S. Treasury bonds – are a hallmark of any low-risk portfolio because they are stable.

Particularly if you hold individual “investment-grade” bonds that are the most creditworthy, there’s only a small chance you will see a loss on paper.

That's true too if you hold individual bonds all the way to maturity instead of selling on the open market to incur changes in principal value.

But you may find yourself behind in other ways – inflation, for one.

Rates on the 10-year Treasury note are around 4.4% at present. And given that inflation readings for 2024 hovered around 3% or so, that won’t exactly grow your nest egg significantly from a purchasing power perspective.

And, over the last decade or two, there have been some periods where interest rates don’t actually keep pace with inflation at all.

So while your bank account may not erode, your ability to pay for things could suffer under a high-inflation environment.

The other risk is simply not having enough money to live on in retirement. At the current 4.4% rate on Treasuries, it would take almost 55 years to turn $100,000 into $1 million.

Consider too that most Americans have far less than $100,000 saved, and some experts estimate much more than $1 million is required to fund a comfortable retirement.

The meager return for low-risk bonds simply doesn’t work for a lot of investors. It's just math.

For investors with significant savings, particularly those at or near retirement, bonds are a different story. You can protect your hard-won nest egg and generate reliable income to live on.

That’s presuming you have enough in the bank, however, and that inflation remains modest.

In reality, stocks and bonds each have an important role in a diversified portfolio.

There is no single investment that works for everyone, and it’s risky for any investor to rely on just one or the other.

Jeff Reeves writes about equity markets and exchange-traded funds for Kiplinger. A veteran journalist with extensive capital markets experience, Jeff has written about Wall Street and investing since 2008. His work has appeared in numerous respected finance outlets, including CNBC, the Fox Business Network, the Wall Street Journal digital network, USA Today and CNN Money.