Jasmine Birtles
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Stocks vs Bonds: Where Should You Invest in 2025?
Ruby Layram
23rd Jan 2025
One of the longest-standing debates in the investing world is: should you invest in stocks or bonds? With markets evolving and economic landscapes shifting, it’s crucial to understand where to place your hard-earned money.
Both stocks and bonds come with unique pros and cons that make them suitable for some investors, and not so suitable for others!
In this guide, we will explore stocks vs bonds, looking at the key differences between the two investments. By the end of this guide, you should be able to confidently decide whether to buy stocks or bonds (or both!).
Overview of Stocks vs Bonds
Stocks represent ownership in a company and offer higher returns with greater risk, while bonds are loans to corporations or governments, offering stability and lower returns.
Stocks may continue to outperform in the short term, while bonds show potential for a resurgence due to stabilizing interest rates and improved yields.
The most common portfolio allocation is to invest 60% in stocks and 40% in bonds.
Focus on diversification, stay informed about market trends, and maintain a long-term investment perspective to navigate potential market volatility.
Understanding Stocks vs Bonds
Stocks and bonds are both types of investments that can form part of a diversified portfolio. Both investments present an opportunity for returns however, stocks are usually seen as offering the most growth potential and are often favoured by risk-tolerant investors who have a long time horizon.
What is the difference between stocks and bonds?
Stocks represent ownership in a company. When you buy a stock, you’re essentially purchasing a small piece of that company, entitling you to a share of its profits and growth. Stocks are known for their potential high returns but come with higher volatility.
Bonds, on the other hand, are loans you give to corporations or governments. In return, they promise to pay you interest over a set period and return your principal (initial investment) at maturity (the end date). Bonds are generally considered safer than stocks but typically offer lower returns.
How did stocks and bonds perform in 2024?
2025 has only just started, which means that the best way to gauge the performance of stocks and bonds is to look at how they performed during 2024.
Reflecting on 2024, the financial markets presented a mixed bag. U.S. large-cap stocks led the way for the second consecutive year, outperforming cash, bonds, and international stocks. Meanwhile, the UK stock market benefitted from the tech rally with the FTSE100 rising 5%.
Although this is pretty modest compared to the performance that was seen in the US, a gain is a gain!
On the flip side, bond investors were pretty disappointed last year. This was due to increasing inflation and lower-than-expected rate cuts (in both the UK and the US).
2025 outlook for stocks and bonds
Let’s take a look at what UK investors can expect from stocks and bonds in 2025. It’s important to note here that nothing is set in stone! Market conditions can change at any time and there is no guarantee that markets will move in the direction that they are forecasted to.
Analysts are expecting modest growth for the UK economy in 2025, with inflation staying just above target. The updated fiscal policies should give the market a bit more flexibility, which could help boost valuations.
But, there are a few concerns to keep an eye on.
A strategist from UBS points out that six out of seven signs of a stock market bubble are already in place, with more retail investors jumping in and some speculative behavior starting to show. This could be a red flag, especially if long-term interest rates go up.
When it comes to sectors, well-run companies should be able to manage rising costs, but challenges like higher National Insurance and a 6.7% minimum wage hike could hurt their profits.
For investors, two key risks are high bond yields and market concentration. With interest rates rising and more protectionist policies in play, borrowing costs could go up and stocks could see some capital outflows.
Plus, since the market is dominated by a few big tech companies, any slip-ups in those stocks could drag down returns for everyone.
What about bonds?
In the UK, current bond yields, around 4.6%, are considered attractive, especially when compared to equities, which have a lower risk premium. Historically, such yields have often led to positive total returns.
Despite these favorable conditions, market volatility is expected to persist. The bond market may experience fluctuations due to uncertainties in inflation and public finances.
You can find out more about the bond market outlook in our recent podcast with Tim Price.
So, Should I Invest in Stocks or Bonds?
Now that we’ve got the clever bit out of the way, should you invest in stocks or bonds in 2025?
Typically, bonds are more suitable for risk-averse investors who can’t afford to risk huge price fluctuations. This could be someone who has a shorter investment horizon (less than 10 years) or someone who plans on using the money that they invest to fund a big life expense.
On the other hand, stocks are appealing to risk-tolerant investors who want to see growth over time. These investors typically have a longer investment horizon (more than 10 years) and are willing to hold on through market downturns.
Although it is possible to invest in one or the other, your best bet is to invest in both!
Striking the right balance between stocks and bonds is key to a resilient investment portfolio. The traditional 60/40 split (60% stocks, 40% bonds) has been a go-to strategy, but it’s essential to tailor this ratio based on your risk tolerance and financial goals.
Read: How to buy stocks in 5 steps
Read: How to buy government bonds
Some things to consider:
- Risk appetite: More risk-tolerant investors might lean towards a higher stock allocation.
- Time horizon: Longer investment horizons can afford more stock exposure.
- Market conditions: Stay flexible and adjust allocations as economic indicators evolve.
Expert Insights
For UK investors, the stock market landscape is currently very volatile. Some analysts express caution regarding the stock market, with one strategist noting that six out of seven indicators typically signalling a stock market bubble are currently present.
This suggests a need for caution, especially if long-term interest rates rise significantly.
In contrast, the bond market presents more favourable prospects. The Bank of England (BoE) is expected to maintain interest rates at current levels, with the potential for modest increases.
This cautious approach aims to balance economic growth with inflation control.
Ultimately, the choice between stocks and bonds in 2025 hinges on personal circumstances, financial goals, and risk tolerance. It’s advisable to consult with a financial advisor to craft a strategy tailored to your needs.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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