Asset allocation is the most important decision for investors.
Stocks have a higher expected rate of return than bonds. They also have a greater amount of uncertainty and volatility.
Bonds have a lower expected rate of return. They are less volatile and the risk of losing money is much lower than owning stocks.
The trade-off between stocks and bonds depends on your financial goals, and in particular your time horizon. For example, if you are planning to buy a house in the near future, bonds might be more attractive because they are less likely to lose value than a stock.
If you are planning for the long term, for example retirement, then owning stocks will have a higher expected return and although you can expect more volatility, a longer term period reduces this risk.
Someone who is focused on the long term and who has the ability and the temperament to accept risk will likely own mostly stocks.
A shorter term view and someone who is more risk averse will likely hold more bonds.
Most investors take a balanced approach. For example, their portfolio might be 60% stocks and 40% bonds.
We suggest that you articulate your financial goals. Understand your schedule. Be aware of the potential return and volatility between stocks and bonds.
The result is a portfolio allocated in a way that fits your situation.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Watson provides wealth management services through Watson Investments. He can be reached at www.watsoninvestments.com.