Understanding the Different Asset Classes
A stock is a tiny sliver of ownership of a company. When a company grows, your teeny piece of the pie should (hypothetically) grow with it. A bond, on the other hand, is a contract. You are loaning your money to some entity (a company, the government), and they pay you a stated rate of interest for using your money.
Stocks are expected to make more money than bonds, but that reward comes with a parallel risk! You don't get 7 percent to 10 percent annual returns in the stock market fo' freesies! And stock market risk comes in the form of volatility.
Volatility is a total mindf*ck. You've heard this word used before, but take a minute to marinate in what it means: money you worked your tush off to save could lose a ton of value at any moment and quickly. In 2008, the stock market was down 50 percent. If you had invested $100,000 in the stock market, a few months later you had $50,000.
Bonds, on the other hand, are predictable. You're probably going to get a lower average rate of return, but there's less volatility than with stocks. That's not to say that bonds are risk free; they aren't. The only risk-free option is keeping your money in cash.*
Next, let's explore two examples of saved money. Using our goals, we can determine how to invest. The first is via a down payment on a house. The second is via retirement. Don't forget to consider time frame and risk!
