Which is More Important: Steady Income or Potential Growth?

When people think about retirement investing, one of the first things that usually comes to mind is bonds, and it's easy to see why.

High-quality bonds are generally less volatile than stocks, and they can provide a more predictable stream of income.

But bonds are not risk-free, and their prices can fall when interest rates rise.

One thing that often gets overlooked is the impact bonds can have on your portfolio's long-term growth.

Now, if one of your goals is to leave an inheritance for your children or loved ones, this is especially important.

Over long periods, US stocks have generally delivered higher returns than high-quality US bonds.

One commonly used historical comparison puts average annual stock returns at roughly twice those of bonds, although results vary depending on the period being measured.

Of course, past performance doesn't guarantee future results, but it does give us some perspective.

So while bonds absolutely have a place in a retirement portfolio, having too much invested in them could mean your money doesn't grow as much as it otherwise could.

Keeping at least part of your portfolio invested in stocks gives you the opportunity for greater long-term growth, although it also comes with more ups and downs.

So if bonds aren't all about growth, what role do they actually play? Well, one of the biggest risks retirees face is something called sequence of returns risk.

It sounds technical, but the idea is actually pretty simple.

Imagine you retire, and then the stock market has a couple of really bad years right at the beginning of your retirement.

At the same time, you're withdrawing money from your portfolio to cover your living expenses.

That combination of taking money out while your investments are down can seriously damage your portfolio because you may be forced to sell investments after their value has fallen.

In the worst-case scenario, it could mean cutting back your lifestyle, returning to work, or even running out of money sooner than expected.

That's one of the reasons bonds can play such an important role.

Because high-quality bonds are typically less volatile than stocks, maintaining an appropriate bond allocation as you approach retirement can help reduce the effect of market swings.

The right amount depends on your expected withdrawals, other sources of income, time horizon, and financial goals.

There's another benefit, too.

High-quality bonds can provide income that is generally more predictable than stock dividends, especially when individual bonds are held to maturity.

Bond funds can also provide income, but their value and distributions may fluctuate.

That regular income can help cover your day-to-day expenses while giving the stock portion of your portfolio more time to recover from market downturns and hopefully continue growing over the long term.

At the end of the day, there's no single investment strategy that's right for everyone.

The right balance between stocks and bonds depends on your goals, your income needs, your comfort with risk, and what you want your retirement to look like.

When people think about retirement investing, one of the first things that usually comes to mind is bonds, and it's easy to see why.

High-quality bonds are generally less volatile than stocks, and they can provide a more predictable stream of income.

But bonds are not risk-free, and their prices can fall when interest rates rise.

One thing that often gets overlooked is the impact bonds can have on your portfolio's long-term growth.

Now, if one of your goals is to leave an inheritance for your children or loved ones, this is especially important.

Over long periods, US stocks have generally delivered higher returns than high-quality US bonds.

One commonly used historical comparison puts average annual stock returns at roughly twice those of bonds, although results vary depending on the period being measured.

Of course, past performance doesn't guarantee future results, but it does give us some perspective.

So while bonds absolutely have a place in a retirement portfolio, having too much invested in them could mean your money doesn't grow as much as it otherwise could.

Keeping at least part of your portfolio invested in stocks gives you the opportunity for greater long-term growth, although it also comes with more ups and downs.

So if bonds aren't all about growth, what role do they actually play? Well, one of the biggest risks retirees face is something called sequence of returns risk.

It sounds technical, but the idea is actually pretty simple.

Imagine you retire, and then the stock market has a couple of really bad years right at the beginning of your retirement.

At the same time, you're withdrawing money from your portfolio to cover your living expenses.

That combination of taking money out while your investments are down can seriously damage your portfolio because you may be forced to sell investments after their value has fallen.

In the worst-case scenario, it could mean cutting back your lifestyle, returning to work, or even running out of money sooner than expected.

That's one of the reasons bonds can play such an important role.

Because high-quality bonds are typically less volatile than stocks, maintaining an appropriate bond allocation as you approach retirement can help reduce the effect of market swings.

The right amount depends on your expected withdrawals, other sources of income, time horizon, and financial goals.

There's another benefit, too.

High-quality bonds can provide income that is generally more predictable than stock dividends, especially when individual bonds are held to maturity.

Bond funds can also provide income, but their value and distributions may fluctuate.

That regular income can help cover your day-to-day expenses while giving the stock portion of your portfolio more time to recover from market downturns and hopefully continue growing over the long term.

At the end of the day, there's no single investment strategy that's right for everyone.

The right balance between stocks and bonds depends on your goals, your income needs, your comfort with risk, and what you want your retirement to look like.