We often hear people talking about the dual allocation of stocks and bonds, but what exactly does it mean? I believe most people don’t quite understand what it means! ?
Let us explain it briefly so that you can understand it easily. After all, not all investors understand what they are doing.
Every time you understand a little more, you will be much stronger than your competitors. As long as you win over them a little bit, your chances of survival will be higher.
What are stocks?
Stocks are like an "admission ticket to become a company shareholder". When you buy stocks of a company, you become a small shareholder.
Stocks will rise and fall depending on company performance and market sentiment, and there is an opportunity to earn money from rising stock prices or receive dividends from the company.
The risk is higher, but you may also earn more.
For example, if you buy TSMC stock, if it makes money and everyone is optimistic about it, the stock price may go up; but if the performance is not good, the stock price will also fall and your investment will also be affected.
What are bonds?
Bonds are a bit like you lending money to a company or government.
They issue you a bond and promise to pay you interest regularly and return the principal upon maturity.
The risk is relatively low and the return is relatively stable.
For example, if you buy a 10-year government bond, you can get interest every year. After 10 years, the government will return the principal to you. The price of the bond will also change, but it is usually not as exaggerated as stocks.
Why should we allocate “stocks + bonds” together?
This is called "asset allocation", which simply means not putting all your eggs in one basket.
Because stocks and bonds don't necessarily rise or fall together, a good combination can make your overall investment more stable.
Just like during the 2008 financial crisis, many stocks plummeted, but high-quality government bonds rose instead, helping investors lose less.
benefit:
Reduce risk: When stocks fall, bonds can hold up the market.
Reduce anxiety: You won’t be anxious all day long just because the market falls, because you know that some assets are relatively stable.
But allocating to stocks and bonds also has risks…
There is no such thing as "only profit and no loss" in this world. Asset allocation is also challenging:
Market risk: If the overall economy sucks, no matter what you have, it may fall.
Just like the recent tariff war initiated by Fat Trump, which directly ruined the global market and caused a temporary economic depression.
Interest rate risk: When interest rates rise, the value of old bonds will fall.
Inflation risk: Prices rise too quickly and the interest you earn may not keep up with the cost of living.
Credit risk: If you buy bonds issued by a company that is about to go bankrupt, it may not even be able to pay the interest.
The summary is that stocks can make you earn more, but the risk is also greater; bonds are stable and the returns are relatively small.
The two together are like one for attack and one for defense, helping your investment be more balanced.
If you still don’t understand after listening to the above, that’s okay.
Just remember one thing: Don't throw all your money into the "sure win" investments recommended by your friends. 』
Because he may be the only friend you are willing to talk to, but he is also the one most likely to bankrupt you.
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