Question

John, 25, just started contributing to his employer's 401(k) plan and started an ira account. he is choosing to invest only in bonds and secure investments instead of high-risk stocks. is john pursuing a wise investment strategy?

Answer 1

Answer:

John is mistaken since the best possible long term investment for a young individual is stocks. Stocks provide the highest potential returns. But they must be considered a long term investment. The price of stocks show an upward  slope, but their price varies every single day. The stocks themselves might lose some value during relatively long periods of time (e.g. months or even a couple of years), but on the long run there is no other investment that yields similar returns.

John has at least 40 years before retiring, and that is a long time, and the potential earnings of stocks is huge. Even if the stock market plummets right before John decides to retire, his stock portfolio will probably have increased so much that a major loss will not make a big difference. And the stock market always rebounds, so his earnings will increase again.

On the other hand, bonds tend to pay very little interest and John will need to contribute a lot of money if he plans to retire with a plan that only include bonds.