While the SEC cannot recommend any particular investment
product, you should know that a vast array of investment products exists – including stocks and stock mutual funds,
corporate and municipal bonds, bond mutual funds, lifecycle funds, exchange-traded funds, money market funds, and
U.S. Treasury securities. For many financial goals, investing in a mix of stocks, bonds, and cash can be a good
strategy. Let’s take a closer look at the characteristics of the three major asset
categories.
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Stocks
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Stocks have historically had the greatest risk and highest returns among the three major asset categories. As an
asset category, stocks are a portfolio’s “heavy hitter,” offering the greatest potential for growth. Stocks hit
home runs, but also strike out. The volatility of stocks makes them a very risky investment in the short term.
Large company stocks as a group, for example, have lost money on average about one out of every three years. And
sometimes the losses have been quite dramatic. But investors that have been willing to ride out the volatile
returns of stocks over long periods of time generally have been rewarded with strong positive
returns.
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Bonds
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Bonds are generally less volatile than stocks but offer more modest returns. As a result, an investor approaching a
financial goal might increase his or her bond holdings relative to his or her stock holdings because the reduced
risk of holding more bonds would be attractive to the investor despite their lower potential for growth. You should
keep in mind that certain categories of bonds offer high returns similar to stocks. But these bonds, known as
high-yield or junk bonds, also carry higher risk.
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