Bonds vs. Stocks

Q Is it better to invest in bonds than in stocks, because they’re safer? — T.W., Columbia, Missouri

A Not necessarily. Stocks tend to grow faster — and you can still lose money with bonds. According to researcher Jeremy Siegel, stocks outperformed bonds in 96% of all 20-year holding periods between 1871 and 2012 and in 99% of all 30-year holding periods. Between 1926 and 2012, the annualized growth rate for stocks was 9.6%, versus 5.7% for longterm government bonds.

Meanwhile, interest rates have been very low for many years now, so they’ll likely start rising one of these years. When they do, the value of existing bonds (with lower interest rates) are likely to drop. You can always hold a bond until maturity to get your full principal back, but that can take a long time.

The values of bond mutual funds can fluctuate with the bond market; they often hold a diverse range of bonds to reduce risk. The stock market can be volatile over a few months or years, but over the long run, it tends to rise. Park long-term dollars in stocks, and put short-term savings in short-term bonds, money market accounts or CDs.

Q If a stock I own splits 2-for-1, what happens to my cost basis, for tax purposes? — S.B., Treasure Island, Florida

A Let’s say you buy 100 shares of Sisyphus Transport Corp. (ticker: UPDWN) for $100 each. Your cost basis is $10,000, or $100 per share. Imagine that it increases to $120 per share and then splits 2-for-1. You’ll end up with 200 shares worth around $60 each, for a total value of $12,000. Your cost basis will still be $10,000, but it will now be $50 per share.