Final answer:
Financial advisors suggest owning both stocks and bonds because diversification helps reduce the overall risk in an investment portfolio. Stocks offer potential for higher returns but are riskier, while bonds are generally safer but have lower returns. The combination can balance risk and provide a steadier income stream.
Step-by-step explanation:
Investing in both stocks and bonds is recommended because diversification can help reduce overall risk. While investing in bonds is considered less risky than stocks, they generally offer lower potential returns. Conversely, stocks provide the opportunity for higher potential returns, but come with a greater risk of loss. Including both in an investment portfolio helps balance potential risk and reward.
Over time, stocks have shown higher average returns compared to bonds, which in turn generally perform better than savings accounts. However, bonds can provide a more stable income stream than stocks, which are subject to greater fluctuations in value. The key is that a diversified portfolio can help mitigate the risks associated with investing in just one type of asset.
By owning both stocks and bonds, investors can benefit from the potential growth of stocks while relying on the more consistent income that bonds may provide. This strategy follows the adage of not putting all one's eggs in one basket, allowing for a cushion against market volatility and unforeseen events that may impact individual investments.