One bit of conventional investing wisdom is that stock mutual funds have much more risk than bond funds. In this article we take a look at how stocks and bonds will have differing risks. We will also look at how much we should invest in stock funds vs bond funds.
Stock represent a partial ownership in a business. But bonds are set up more like a loan to that business. Upon examining a typical bond issue, if you ignore the risk that the issuing company might go bankrupt at some point, you find that you know precisely how much money you will receive back and when you will receive it. Take this case as an example, if you bought a bond with a 6% yield on that bond, it will probably be paid as a 3% dividend every twice a year. If you hold that bond issue to its final maturity, you will receive the face value of the bond back, say $10000. The key thing to note is that you would have to hold it 20 or 30 years to receive all your money back.
But, as we all know, there is always some risk that you will not be able to hold the bond to its final maturity date. In that case, you can always sell it on the open bond market, but if prevailing interest rates have risen,...
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