Equities and bonds can both be traded in essentially the same way, but ownership of each entitles investors to do different things. A bond is a loan that you can trade. The valuation is based on the eventual repayment of the bond at maturity.
Equities are little slices of ownership in a company. As a stockholder, you’re part owner.
Many large companies have hundreds of millions of outstanding shares of stock, so the piece you own for each stock is exceedingly tiny. However, that share still entitles you to some rights. Common shareholders (which are most average shareholders) have several rights as investors:
- The ability to transfer ownership of their share/s
- Voting rights for some decisions, like the company’s board of directors
- Entitlement to dividends (a little slice of the business’s profits)
- Entitlement to see and inspect corporate documents
- The ability to sue management and company leaders for misbehavior or mismanagement
- Liability up to the value of your shares – meaning no one who sues the company can go after your personal assets
This is entirely different from a bond, in which you own some debt and not a piece of the company. Ownership of a corporate bond doesn’t entitle you to any say in how that corporation is run.
Equities are also not loans. The company doesn’t have to pay you back with interest for your stock purchase. You are assuming the risk of ownership with your purchase.
From an investor’s perspective, the tradability of bonds and equities isn’t all that dissimilar. Both can be bought through brokerage accounts. Both might be held in funds that you can buy into.
Difference in Risk and Return
Maybe the most important difference between the equities market (stocks) and fixed-income markets (bonds) is their risk and growth potential.
Bonds are loans issued by either a government or a company. Although the world is an unpredictable place, bond repayment is quite reliable. U.S. treasury bonds are backed by “the full faith and credit” of the federal government, which is why many domestic and foreign investors consider them to be virtually risk free.
A 2021 analysis found the average default rate in the corporate bond market over the past 32 years was just 1.47 percent. Bond default risk isn’t the same across the board. AAA-rated bonds had a 31-year average zero percent default rate, while AA-rated bonds had just a 0.2 percent default rate.
Equities are an entirely different beast in terms of risk and reward. Bonds offer predictable but modest returns while equities have dramatic growth potential. At the market’s pandemic low point, the S&P 500 closed at 2,304.92 (March 20, 2020). On March 20, 2021, the S&P 500 closed at 3,881.74. That’s a 68.4 percent growth over one year.
Equities also have equally dramatic loss potential. As of May 20, 2022, the current 52-week high of the S&P 500 is 4,818.62 and the 52-week low is 3,858.87. That type of volatility makes equities inherently risky.
Trading equities can also be far more confusing than bond trading. Experts rarely agree across the board on the future of the market. Equity markets can be upset by tangible domestic struggles (like extraordinarily high inflation) and geopolitical upheaval. While many people do their best to predict which equity investments are winners and losers, no person has a crystal ball or fool-proof algorithm to eliminate risk.
What’s Right for Your Retirement Investments?
There is no simple answer for most retirement investors. Variables like current interest rates, market volatility and national and global economic wellness will likely impact your investment portfolio. More importantly, your own life and risk preferences should dictate your choices. As a rule of thumb, young retirement investors can more easily weather equity downturns and recessions because they won’t begin withdrawing their retirement savings dollars for several decades.
The risk calculation is entirely different for current retirees or soon-to-be-retirees who will need to begin withdrawing funds from their retirement savings accounts within the next few years.
Speak With an Investment Manager or Retirement Advisor in Phoenix
Economic uncertainty and bear markets can be extraordinarily stressful for people of all ages, but the anxiety can be especially acute if you’re nearing retirement or are retired. The team at Fullerton Financial Planning is here to help you make informed decisions. Contact us at (623) 974-0300 to speak with an investment advisor or certified financial planner today. You may also visit one of our two locations: Tempe and Peoria, AZ.
