Getting Started (Part 2): Stocks, Bonds and Cash

January 24, 2013

Many investors use a New Year as a time to get their investments in order. To help, we’re launching a series of posts to help investors who are just getting started with a new investment program. First, we looked at the importance of having a plan. Now, we consider the building blocks of a portfolio: stocks, bonds and cash.

All investors have the same three investment choices: stocks, bonds and cash. Most investors need at least some exposure to stocks to meet their investment goals because stocks offer the best long-term returns.  As the chart below shows, stocks have outperformed bonds in every rolling 25-year period from 1925 through December 2011.

The chart shows 25-year total returns of stocks vs. bonds for every 25-year period from 1925 through 2011. The first 25-year period was from December 1925 to December 1950; the next from January 1926 to January 1951, and so on, for a total of 732 25-year periods ending December 2011.

While stocks gained more than bonds over the long term, stocks have often been quite volatile over the short term – and volatility can distract investors from their long-term investment goals. One easy way to buffer the volatility of stocks is to include an allocation to bonds. A balanced portfolio of stocks and bonds can allow you to participate in the growth of stocks with a buffer against declines – and investors who hold both stocks and bonds have a better chance at staying invested during difficult market periods.

What about cash? Cash should be used to fund very short-term goals, since both stocks and bonds can lose money if held for just a few years.

To read more about the long-term history of stocks, bonds and cash, click here.

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