Q&A: Should I Invest in Stocks or Bonds?

Question: I have $5,000 to invest. Should I invest in stocks or bonds?

Answer: It's important to know three things when deciding which type of investment is right for you:

Your goals, such as retirement or a college education

Your risk tolerance, or tolerance for changes in the value of your investment portfolio

Your time horizon, which defines how long your investment will be working toward your goal

Next, consider the various types of investments available to you and their risks and rewards. For long-term growth, stocks are hard to beat. But stocks also carry the highest risk. Bond returns are more modest than stock returns, but bonds are considered less risky than stocks. Money market investments are appropriate in certain circumstances -- such as when you're investing for a short-term goal.

In addition, many investors choose to diversify their investments among stocks, bonds, and money market securities. When you're diversified in this way, a decline in any single investment has less of an impact on your overall portfolio and may be offset by increases in other investments.

American Century's tutorial "Investing With a Purpose" provides information about diversified investment strategies using mutual funds. A mix of stock, bond, and money market funds can provide diversification and professional investment management compared to investing in individual securities.

Douglas C. Lockwood, BS, MBA, JD, CFP writes on behalf of American Century Investments. This information is for educational purposes only and is not intended as investment advice.