Equity Vs Debt Investment: Which Is Right For You?

When it comes to investing your money, two of the major options are equity and debt investments. Both offer the potential for solid returns over time, but the risks and rewards differ significantly between the two choices. As an investor, you need to understand these distinctions clearly before deciding where to put your money. In this article, let’s explore equity vs debt investment in depth to help determine which is right for your needs and risk tolerance.

Seek High Returns with Equity

Equity investments, like stocks, represent ownership in a company. When you buy shares of stock, you become a part-owner of that business. The potential upside of equity is significant since stock values can rise dramatically over time as a company grows. Historically, the stock market has returned an average of 7% annually after inflation. For long-term wealth building, the power of compounding high-yield returns from equities is hard to beat.

However, the downside is that equity values can plunge if a company struggles or the overall stock market declines. There is a real risk that equity investments drop significantly in value right when you need the money. Equity investments require a higher tolerance for risk and volatility to achieve those strong potential returns. If you have a long-time horizon, equities should be a core part of your portfolio. But for short-term needs, the volatility risk is too high.

Minimize Risk With Debt

On the other hand, debt investments like bonds and CDs represent a loan to a company or entity. You are earning interest on your money while it is borrowed by another party. Debt investments typically offer lower but more stable returns than equities. The risks are lower because the entity that issued the debt is legally obligated to repay the total amount borrowed plus interest. Even if a company goes bankrupt, debt holders are first in line to be repaid, before equity investors.

That said, some types of bonds do carry higher risks, and bond values can decline in a rising interest rate environment. But for the most part, debt returns are more predictable and less volatile than equity. This makes debt a good choice for short-term investment horizons or for money, you cannot afford to put at much risk. The trade-off is that debt typically earns significantly lower returns than equities over the long run. For higher-yield debt, look to options like high-yield corporate bonds or emerging market debt.

Also check – CNXXF Stock Price Forecast 2018 PDF Download

Choose The Best Investment Mix For Your Needs

For most investors seeking the best balance of risk and return, the ideal strategy is to invest in a mix of both equities and debt keyed to your financial goals and timeline. Equities should fuel the long-term growth of your portfolio, while debt helps provide stability and income. Within each category, focus on investments suited to your risk appetite.

For example, a good core portfolio could be 60-70% in equity (a globally diversified stock fund) and 30-40% in debt (short-term and intermediate-term high-quality bonds). For short-term needs in the next 1-2 years, shift to safer debt options with little risk of loss of principal, such as money market funds, CDs, and short-term Treasury bills – these are the best low-risk short-term investments. Equities are not appropriate for any funds needed in the near term.

Reassess Annually

Your needs change over time, so review and rebalance your investment mix at least annually to ensure it continues to match your financial goals. Equity vs debt is not an either/or choice. Utilizing both in the proportions right for your timeline is the ideal strategy for most investors to reduce risk while optimizing returns. Choosing the appropriate mix of equities and debt aligned with your objectives will serve you well in the long run.