Equities vs Bonds: A Guide

It’s handy to note that when people talk about equities, they're typically referring to stocks or shares, which are the most common type of equity investment available to individual investors.  

What's the difference between equities and bonds? 

Simply put, equities mean you own a slice of a company, while bonds are basically IOUs - you're lending money to someone who promises to pay you back with interest.  

When you buy equities: 

• You're a part-owner of the company (even if it's just a tiny slice!)
• You might get dividends if the company's doing well 
• Your returns depend on how the company performs 
• There's no guaranteed payback

When you invest in bonds: 

• You're essentially a lender to the issuer (government, corporation, etc.)
• You get regular interest payments
• You should get your initial investment back when the bond matures
• Returns are typically more predictable than with stocks

So, what's better: Equities or bonds?

The answer depends entirely on your circumstances, goals, and risk tolerance. The bonds vs equities debate isn't about finding a universal winner - it's about finding the right balance for you. 

Looking at market history, equities generally offer higher returns than bonds over longer periods, but this potential comes with greater price swings. A perfect example is the 2008 financial crisis, when stock markets around the world saw dramatic drops while many government bonds held their value, or even gained, as investors looked for safer options. This pattern of ‘higher risk, higher potential reward’ is a fundamental principle in investing. 

Finding your balance 

Financial advisers often suggest that a balanced portfolio - such as 60% equities and 40% bonds - tends to give you most of the growth potential of the stock market but with fewer ups and downs. This mix helps you benefit from upswings while softening the blow when markets go down. 

What’s ideal for you might depend on: 

• Your time horizon. If you have decades before retirement, you might want more equities. Bonds might be safer if you’ll need the money sooner.
• Your stomach for risk. If market swings keep you up at night, more bonds might help you sleep better.
• Your income needs. Bonds typically give more reliable income, which could be crucial if you're retired.

The bottom line 

Whether you lean towards equities or bonds - or most likely, a smart mix of both - understanding how these investments work helps you make better decisions.

Remember, there's no perfect formula for everyone, and your ideal balance will probably change as your life does. Consider chatting with a financial adviser who can help tailor an investment strategy just for you.