Stocks vs Bonds: Which Should I Invest In?

The stocks vs bonds debate is the most fundamental allocation question every investor must answer, and the greatest investors in history have strong opinions on the matter. The short answer is clear: for long-term wealth building, stocks win overwhelmingly. But the nuanced answer depends on your time horizon, risk tolerance, and life circumstances.

Warren Buffett has been unequivocal about his preference: "I would rather own equities at 50 times earnings than long-term bonds at current rates." This is a striking statement because 50x earnings is extremely expensive for stocks. Yet Buffett still prefers them over bonds because stocks represent ownership in productive businesses that grow, while bonds are simply loans that pay fixed interest.

The historical evidence is decisive. Jeremy Siegel's landmark research in Stocks for the Long Run shows that from 1802 to 2024, U.S. stocks returned approximately 6.7% annually after inflation, while bonds returned approximately 3.5% and gold returned approximately 0.7%. Over 30 years, $10,000 invested in stocks grew to approximately $66,000 in real (inflation-adjusted) terms, while $10,000 in bonds grew to approximately $28,000. Over 50 years, the difference becomes staggering: stocks produce roughly $250,000 while bonds produce $55,000.

Buffett's specific instruction for his estate -- 90% S&P 500 index fund, 10% short-term government bonds -- reflects his belief that the only role for bonds in a portfolio is to provide liquidity and stability for near-term needs. The 90/10 split is not 60/40 or 50/50 -- it is overwhelmingly tilted toward stocks because Buffett believes long-term investors are compensated for equity volatility with dramatically higher returns.

Charlie Munger is even more dismissive of bonds: "Bond portfolios have proven to be terrible investments over the long run compared to equities." Munger argues that bonds seem safe but actually guarantee purchasing power destruction over long periods when inflation is factored in. A 4% bond yield minus 3% inflation delivers only 1% real return -- barely above zero.

## Your 5-Step Action Plan

**Step 1: Determine Your Time Horizon.** If you won't need the money for 10+ years, allocate 80-90% to stocks. If you need it in 3-5 years, a 60/40 or 50/50 split is more appropriate. If you need it in less than 2 years, keep it in short-term bonds or high-yield savings.

**Step 2: Match Bond Duration to Your Timeline.** If you hold bonds, never buy long-term bonds (20-30 year maturity) for short-term needs. Use short-term Treasuries or bond funds with average maturities under 3 years. Long-term bonds are extremely volatile when interest rates change.

**Step 3: Use Buffett's 90/10 as Your Benchmark.** Unless you have specific reasons to deviate, start with 90% low-cost stock index fund and 10% short-term bond fund. Adjust based on your personal risk tolerance: if market drops of 30-40% would cause you to panic sell, increase bonds to 20-30%.

**Step 4: Rebalance Annually.** Once per year, rebalance back to your target allocation. If stocks rose and now represent 95% of your portfolio, sell some and buy bonds to return to 90/10. This systematic process forces you to sell high and buy low.

**Step 5: Don't Chase Bond Yields.** When interest rates are high, bonds feel attractive. But remember: you are locking in a fixed return. If you buy a 5% bond and stocks average 10% over the next 30 years, you are giving up enormous compounding power. Bonds are for stability, not wealth building.

### The Bottom Line

For long-term wealth creation, stocks are dramatically superior to bonds. Over every 30-year period in history, stocks have outperformed bonds. The only rational roles for bonds in a long-term portfolio are providing short-term liquidity, reducing portfolio volatility for emotional comfort, and funding near-term spending needs. As Buffett says, "Never bet against America" -- and owning stocks is how you bet on American business.