Stocks and Bonds: When to Choose Bonds Over Stocks

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Why Choose Bonds Over Stocks

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When Are Bonds Safer Than Stock Investments

The first reason to choose bonds over stocks in your investing strategy is when bonds are expected to be less risky than stocks. Determining just when bonds will do better than stocks is not always easy. However, there are market indicators and economic signals that can point savvy investors in the right direction.

The outlook for bonds in 2010. for example, is based upon how the economy moves on from the recession. How municipal bonds will perform depends a lot on how the states and governments that issued those bonds navigated their way through the real estate bubble insipired recession. The good news is that the crippling economic recession that left many states and local governments in dire straights, is easing as tax collections pick up from their recessionary lows. That makes municipal bonds a less risky investment than they were last year.

However, how does the outlook for municipal bonds in 2011 appear? That answer is hazier thanks to the impending end of stimulus funds from the Federal Government. Without these economy boosting projects helping prop up local economies, tax collections could fall again. Worse yet, a lot of stimulus dollars went straight into the coffers of local governments, allowing them to avoid difficult cuts in certain services and programs like education. When that money goes away, state, county, and city budgets could all get a lot tighter.

The much larger world of corporate bonds is also improving. The same recession that hammered the states pushed many publicly traded corporations right to the edge. While the banks and Wall Street firms enjoyed multi-billion dollar bailouts, most other companies had to resort to good old fashioned cost cutting. That is good news for bond holders who will find the issuers of their debt in a much better position to pay as revenues flow back into businesses with lower expenses.

Of course, the biggest issue for bond holders to arise out of the 2008 recession is the debacle of the ratings agencies. Moody’s, Standard & Poors, and Fitch all rated what are now known as toxic investments at their highest bond rating levels. That leaves investors in the difficult position of determing what level of faith should be placed in financial companies that were so easily duped by their Wall Street counterparts.