Investments and Principal Protection

As you select the right mix of stocks and bonds for your retirement assets, consider this fundamental difference between them: When you own stocks, there is nobody guaranteeing that you will get back the amount you originally paid. With bonds, however, the issuer and its creditworthiness promise repayment. And when that issuer is the U.S. government, you can be sure your principal is protected.

But note that protection of principal is not the same as protection of value. A rise in interest rates or turbulent market forces can cause a bond to decrease in value even as the creditworthiness of its issuer remains unchanged.

And with both stocks and bonds, nobody is promising to repurchase the investment if you suddenly find you need to convert some of it to cash. For that, you are relying on the existence of an active and liquid marketplace—the stock or bond market—where buyers and sellers meet (anonymously) to set prices and make deals.