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What Is the Difference Between Bonds & Equity in a Stock Portfolio?

Original post by Jonathan Langsdorf of Demand Media

Financial planning experts recommend that an investment portfolio balance holdings among stocks, bonds and cash. The stock holdings are the equity portion of a portfolio. Bonds are the fixed-income allocation. How an investor balances his portfolio between bonds and equity is determined by several factors.

Equity Investments

Equity refers to ownership. Stock shares represent ownership in a company, so stocks are the equity in an investment portfolio. The equity portion of a portfolio should provide long-term growth of value, plus the possibility of income from stock dividends. Stock share values can be quite volatile, with periods of time -- called bear markets -- where almost all of the stocks listed on the exchanges decline in value. During positive stock market periods, the returns to investors can be very attractive, with the overall market increasing by 20 or 30 percent or more per year.

Fixed Income

The fixed-income portion of an investment portfolio is usually filled by bond investments. These investments pay a fixed rate of interest and mature with the principal value paid to the investor. The market value of bonds can rise and fall with changes in interest rates, but the fluctuations will, in most market conditions, be less volatile than the stock market. Investment bonds include government, foreign, municipal and corporate bonds.

Investment Choices

An investor can use several different types of investments to make up the equity portion of an investment portfolio. Besides individual stocks, she could use stock mutual funds or stock exchange-traded funds, or ETFs. All of these investments would be categorized as equity. Investing in bonds can also be accomplished using mutual funds or ETFs. Whether a fund is equity or income depends on the type of securities a fund hold. Some funds, often referred to as lifestyle or target retirement funds, are a balanced portfolio of both stocks and bonds in a single mutual fund.

Asset Allocation

The Securities and Exchange Commission website states the asset allocation percentages between the different types of investments should be based on your personal situation. Important factors are the investment period or time frame, risk tolerance and comfort with the different investments available. The different asset types -- equity and bonds -- will move up and down in value, often on different cycles. A portfolio balanced between the two types of investment classes, plus a portion in cash, will have more stable value and growth over time than investing all of your money in just one asset type.



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