When building your investment portfolio, you'll inevitably face the classic question: Should you choose bonds or equities?
When building your investment portfolio, you'll inevitably face the classic question: Should you choose bonds or equities? Understanding the key differences between equities and bonds can help you make an informed decision about what's the most suitable for your financial goals.
Understanding the difference between equities and bonds
Bonds are essentially IOUs issued by governments or corporations. When you buy a bond, or a “gilt” if it’s a UK government bond, you're lending money to the issuer in exchange for regular interest payments (called coupons) and the return of your principal when the bond matures.
Equities, or stocks, represent ownership shares in companies. When you buy equity, you become a part-owner of that business and benefit from its growth through rising share prices and potential dividend payments.
In the UK, the primary equity benchmark is the FTSE 100, which tracks the largest 100 companies by market capitalisation.
What's better: Equities or bonds
The answer depends on your circumstances, but 2025 might be particularly interesting for UK investors:
Bonds are looking attractive again. The government recently sold bonds paying 4.49% interest, and many are available at discounted prices. This means you could buy them inexpensively and get the full value back when they mature.
For UK taxpayers, government bonds have a special advantage: you won't pay Capital Gains Tax (CGT) on any profits. This is particularly valuable now that the tax-free allowance for CGT has been dramatically cut from £12,300 to £6,000 in 2023, and further reduced to just £3,000 from April 2024.
Despite their ups and downs, shares have historically delivered better returns, faster, than bonds over the long term. They also offer protection against inflation, with many companies increasing their dividend payments over time.
Are bonds safer than equities?
Yes. Bonds are generally much safer than stocks for several key reasons. The British Government has never missed a payment on its bonds, and they are less volatile than shares and provide steady income.
Most importantly, if a company goes bankrupt, bondholders get paid first from whatever's left, while shareholders usually lose everything. Only 1.5% of UK companies actually failed to pay their bonds last year, making bonds a much more reliable choice than the ups and downs of the stock market for protecting your money.
Making your choice
Choose bonds if you need predictable income, are risk-averse, or are approaching retirement, as they provide steady returns with lower volatility. Choose equities if you're investing long-term, can tolerate market ups and downs, and want protection against inflation, since stocks historically grow faster over time.
For most investors, holding both makes sense because bond holdings have historically offered a counterbalance to the volatility in equity markets, creating a more stable overall portfolio.
Ready to optimise your investment strategy? Speak with our qualified financial advisers to create a portfolio that balances growth potential with your risk tolerance.
