Let’s think about stocks and bonds in terms of a relationship.
Stocks are like your boyfriend/girlfriend or spouse. You are connected with them. Their success is your success. If they get a promotion, you celebrate and reap the rewards. If they come home and tell you they’ve been fired, that has real repercussions for you. If they want to take their savings and blow it in Vegas, you would try to talk them out of it because you not only have an interest in their well-being, but you also have a financial interest in their success and failure as well. If they win the Powerball lottery, you win the lottery. A stock is your significant other.
Relationships can be a bit rocky. From the highs of walking hand in hand on a Caribbean beach, to the lows of arguing, yelling, and even breakups, relationships give you the highest highs and the lowest lows. There is an intensity and volatility to relationships – or maybe it’s just my relationships – in the same way that is true for stocks. They are volatile. They can produce great returns or make you go bankrupt.
Now let’s look at a bond. A bond is like a friend. Do you care about your friend? Of course! You want them to succeed and do well. But on some level, if your buddy wants to blow some money in Vegas, as long as he can pay you back the money you lent him, you don’t really care. If he hits the jackpot and wins millions, good on him. If he comes back broke, beaten up, and with an STD, that’s too bad, but it’s not going to ruin your day. Your friend’s success or failures don’t have much of an impact on your daily life. A bond is your friend.
There is also much less volatility in a friendship. Things are usually pretty stable. If you have a little tiff or get sick of your friend, you give it a few days and everything is back on track. There isn’t the same level of intensity or volatility. The same is true for bonds.
Stocks are like a significant other. Stocks are a commitment. They represent a long-term interest in the success of a company. For better or for worse. For richer and for poorer.
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.