Pros and cons of stocks and bonds | American Funds

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Retirement Planning

Pros and cons of stocks and bonds

Stocks and bonds each have a different level of risk and behave differently in response to changes in the financial markets. They may also be key ingredients in your mutual funds.

Putting portions of your money into different types of investments could help you in case some of them don’t measure up.

  • Stocks typically have potential for higher returns compared with other types of investments over the long term.
  • Some stocks pay dividends, which can cushion a drop in share price, provide extra income or be used to buy more shares.
  • Stock prices can rise and fall dramatically.
  • There is no guaranteed return.
  • Bonds tend to rise and fall less dramatically than stocks, which means their prices may fluctuate less.
  • Certain bonds can provide a level of income stability.
  • Some bonds, such as U.S. Treasuries, can provide both stability and liquidity.
  • Historically, bonds have provided lower long-term returns than stocks.
  • Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.

As you can see, each type of investment has its own potential rewards and risks. Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns.

By owning a mix of different investments, you’re diversifying your portfolio. Doing so can curb the risks you’d assume by putting all of your money in a single type of investment.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional or downloaded and should be read carefully before investing.

Managing risk

Find out about investing risk and determine how much you can handle.

Asset allocation

Use our sample portfolios
as a guide to build your
investment strategy.