# What is the difference between stocks and bonds?

> Stocks are company ownership that swings more. Bonds are loans that pay interest and swing less. Mix them by time horizon.

Source: https://www.walletprep.com/learn/stocks-vs-bonds/ · Updated 2026-10-01 · Investing

A stock is a share of ownership in a company, and a bond is a loan you make to a government or company in return for interest. Stocks have tended to grow more over long periods but fall harder along the way, so most people hold both and shift toward bonds as they get closer to needing the money.

## Key facts
- **Risk and return travel together.** Investments that can grow more can also fall more. Stocks have higher expected returns than bonds over long periods because people need a reward for living with bigger swings. Neither is promised.
- **Your time horizon sets the mix.** The longer until you need the money, the more drops you can wait out, and the more stocks you can usually hold. Short-term money belongs in bonds or cash.
- **Markets move your mix over time.** When stocks rise faster than bonds, your portfolio drifts toward more stocks and more risk. Rebalancing moves it back to the mix you chose.
- **Bonds are not risk free.** Bond prices fall when interest rates rise, and a borrower can fail to pay. Short-term government bonds carry the least of these risks.

## What a stock is
When you buy a share of stock, you own a tiny part of a company. If the company earns more over time, its shares tend to be worth more, and some companies also pay part of their profits as dividends.
Stock prices change every trading day. A single company can fall by half or go out of business, which is why most people own stocks through a broad index fund that holds hundreds or thousands of them.

## What a bond is
A bond is a loan. You lend money to the US government, a city or a company for a set number of years. In return it pays you interest, usually on a schedule, and pays back the face amount when the bond matures.
Bond prices still move. If interest rates rise, older bonds paying lower rates are worth less, and longer bonds move more. Bond funds hold many bonds, so they rise and fall a little all the time, but usually far less than stock funds.

## The tradeoff between risk and return
Over long periods in the US, stocks have tended to earn more than bonds, and bonds more than cash. The price of that extra return is bigger and more frequent drops. Stocks have fallen 30% or more in a single year more than once.
Examples on this site assume 7% a year for a stock-heavy mix. That is an assumption for illustration, not a forecast. A 30-year stretch could earn more, less, or lose money along the way.

## Choosing a mix by time horizon
Your asset allocation is your split between stocks, bonds and cash. A person in their 20s saving for retirement 40 years away can usually hold mostly stocks, because there is time to recover from several drops.
Someone 5 years from retirement, or saving for a house down payment in 3 years, has less time to recover. They usually hold more bonds and cash. Your own comfort matters too. A mix you can stick with during a drop beats a bolder one you abandon.

## How rebalancing works
Pick a target mix, such as 70% stocks and 30% bonds. Once a year, check your balances. If stocks have grown past 70%, move the extra into bonds. If they have fallen below, move money the other way.
Rebalancing means you sell a little of what has risen and buy what has lagged. In a 401(k) or IRA, moving money between funds doesn't trigger tax. In a regular brokerage account, selling at a gain can, so direct new money to the side that is below target instead.

## Target-date funds do it for you
A target-date fund holds stock and bond funds in one package. Its mix starts mostly in stocks and shifts toward bonds as the year in its name gets closer, and it rebalances on its own.
Funds with the same target year can hold quite different mixes, so read the fund's description to see how much it holds in stocks at your age and near the target date.

## A worked example: Alex rebalances after a strong year
Alex, 35, has $20,000 invested at a target of 70% stocks and 30% bonds: $14,000 and $6,000. Assume stocks gain 20% and bonds 3% over the year.

- Stocks: $14,000 + 20%: $16,800
- Bonds: $6,000 + 3%: $6,180
- Total after one year: = $22,980
- Target stocks share: 70%
- Stocks now: $16,800
- Stocks target, 70% of total: −$16,086
- Move from stocks to bonds: = $714

1. Stocks grow to $14,000 × 1.20 = $16,800 and bonds to $6,000 × 1.03 = $6,180, for a total of $22,980.
2. Stocks are now $16,800 ÷ $22,980 = 73% of the total. Alex's target is 70%, which is $22,980 × 70% = $16,086.
3. Alex moves $16,800 − $16,086 = $714 into bonds. Bonds become $6,180 + $714 = $6,894, which is 30% of the total.
4. The returns here are assumptions. In a year when stocks fall, the same steps move money from bonds back into stocks.

### What $200 a month becomes in 30 years at different assumed returns (examples only, not forecasts)

| Annual return | Balance after 30 years | Of which growth |
| --- | --- | --- |
| 3% | $116,547 | $44,547 |
| 5% | $166,452 | $94,452 |
| 7% | $243,994 | $171,994 |

## Common mistakes
- **Holding all stocks for short-term money.** Money you need for a house or tuition within a few years can't wait out a 30% drop. Keep it in savings or short-term bonds.
- **Never rebalancing.** After several strong years for stocks, a 70/30 mix can drift to 80/20 or more without you noticing. That is more risk than you chose.
- **Adding funds around a target-date fund.** A target-date fund is built to be your whole mix. Adding other stock or bond funds on top changes the balance it was designed to keep.

## Questions people ask
### Are bonds safer than stocks?
Bonds usually swing less, especially short-term government bonds. They can still lose value when interest rates rise, and a company can fail to repay. Lower risk also tends to mean lower long-run growth.

### What is a good stock and bond mix for my age?
There is no single right answer. A target-date fund for your expected retirement year gives one reasonable mix that changes as you age. Your comfort with drops and other savings matter too.

### How often should I rebalance?
Once a year is common and simple. Some people rebalance only when a side drifts more than 5 percentage points from target. Either works if you stick to it.

### Should I sell stocks when the market drops?
Selling in a drop locks in the loss. If your mix fits your time horizon, a drop is when rebalancing may actually move money into stocks, not out.

## Do this today
Log in to your retirement account and write down how much is in stock funds and how much is in bond funds. Divide stocks by the total and compare it with the mix you want.

## Sources
- [Investor.gov: Stocks](https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks)
- [Investor.gov: Bonds](https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds)
- [Investor.gov: Asset allocation](https://www.investor.gov/introduction-investing/getting-started/asset-allocation)
- [Investor.gov: Rebalancing](https://www.investor.gov/introduction-investing/investing-basics/glossary/rebalancing)
- [Investor.gov: Target date funds](https://www.investor.gov/introduction-investing/investing-basics/glossary/target-date-funds)

_General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act._