Let’s say you do want to invest your money. Do you want to loan or do you want to own? What sort of risks would you be willing to take?
College graduates are often faced with two simple options for investing money when they get their first job. You can figure out how the stock market works and become an owner by buying shares in a company. On the other end, you can buy bonds and become a loaner since you’re loaning out money to the company when buying bonds.
Is it better to be a loaner or an owner? Should you invest in the stock market? Should you buy bonds instead? This article will look at both sides of the coin so that you can make your own decision.
What do you need to know about being an owner?
When you buy stocks you own a share of the company. Each share that you own holds the potential to increase in market value. This means that if the share increases and you choose to sell it, you’re going to make a nice profit. If you know what you’re doing and conduct your own research on a consistent basis, you can see a decent return on your investment.
Buying and selling shares for an expected profit is definitely much more riskier than buying bonds. It used to be argued by financial “experts” that stocks outperform bonds, but this hasn’t been the case recently. More young investors are leaning towards exiting the stock market and finding other options for their hard earned money.
According to an article on CNN Money, by 2008 the bond market had started to greatly outperform the stock market as a whole. If you understand stock market basics, you’ll know that even well-managed companies can decrease in value because of market swings and economic problems. This is why you must understand the risks that come with buying and selling shares.
Who would you want to loan money?
When you buy bonds you’re loaning money. The money that you earn is the interest that the company pays you for borrowing your money. Essentially a bond is an IOU and the issuer of the bond will pay you back the full loan amount with interest payments.
The obvious setback is that you won’t earn much interest on your money with a bond. The safer an investment, the lower the return usually is. This is why it’s not worth placing a large chunk of your savings into bonds.
Before you consider either to loan or to own, you need to ensure that you’ve dealt with any debt that you may have remaining from your student credit card. It’s also important that you once again consider your risk tolerance. How much risk can you really handle?
Do you want to start investing in bonds? Or will you put your money in the stock market?
About a quarter of my IRA portfolio is in bonds. Probably 50% is in income stocks. Actually, I own shares of mutual funds that own bonds and stocks. They tend to be cheaper to buy (e-trade has hundreds of no-load, no-transaction fee funds), and possible to buy in smaller amounts.
3/4 of my retirement account is in “low performing” options like income stocks and bonds because I just don’t have that high of a risk tolerance. Although I do have one aggressive-growth fund in my portfolio. It goes up a lot faster, during good times, but it also seems to be a lot slower to recover from bad times.