Stocks vs. Bonds

Investors face many choices when trying to construct the optimal investment portfolio. Among them is the choice between stocks or bonds. Each security has different risk and return characteristics, so there is almost always a trade-off between the two. We face similar choices when pursuing relationships.

Stocks
Think of all the extremely popular, good looking people who everybody notices. They're charming, engaging, and drop-dead gorgeous. We'll call these people stocks. Everyone has heard stories about people who made a fortune investing in the stock market. Because of this, most people perceive stocks as a sexy, high-profile investment. We'd all like to hit it big in the stock market, but along with the potentially high returns comes an associated degree of risk. You never know when a stock is going to tank.

For example, you may invest in a relationship with a bodacious blonde girl only to discover that she has relied solely on her beauty to advance through life, and is wholly lacking in character and basic life skills. Girls can end up in a similar situation with a guy who turns out to be a huge jerk with no ambition, ultimately turning into a lazy, beer drinking piece of white trash. Truly a sad situation.

On the upside, stocks don't always crash. Actually, on average, the stock market is one of the best performing long-term asset classes in the market. But the key phrase is LONG-TERM. Many investors play the stock market on a short-term basis hoping to strike it rich but end up getting burned. So your best bet is to approach these relationships as a long-term commitment. You may score once in a while through day trading, but most people ultimately find that they've just been wasting their money.

Bonds
Now think of your average Jane or Joe: not strikingly attractive, but not grotesquely ugly either. Their main draw is their strong and steady character. We'll call these people bonds. Although less well-known among the general public, bonds make up a huge portion of the capital markets and generally produce a steady, albeit relatively modest, return. But this is their main draw - their steady, long-term return on investment.

Since these people can't necessarily rely on their charm and good looks, they develop themselves in many other ways. Consequently, they usually provide solid support in relationships and make decisions with the long-term horizon in mind. Of course, bonds have their downside as well, but the risk is much smaller, especially if you invest in AAA rated bonds (i.e., they have good credit).

Hybrid Investments
You may also want to consider some alternative investments like preferred stock, debt with warrants, or convertible bonds. These securities combine the best of both worlds - someone who is good looking AND has a strong character.

The only problem is that these investments are much less common. The nature of capital markets results in the issuance of many more stocks and bonds than hybrids. Typically, only insiders or specialized investors, like venture capital and mezzanine groups, have access to these investments. But if you work hard enough, you just might find yourself in the right place at the right time.

A Word on Fund Managers
Whatever your strategy, make sure you take an active role in managing your own investments. Don't rely on setups or blind dates. On average, less than five percent of fund managers outperform the market, so the value-add for their service is questionable. Perform adequate due diligence on all your investments, and you will eventually find a winner.