Over long periods, stocks have historically returned significantly more than bonds or cash, though they are risky over short periods because of their potential for wide and unpredictable price swings. The volatility of stocks is reduced as your holding period increases. When you own a bond, you re loaning money to a company or the government. Historically bonds are less likely to lose money than stocks over short time periods. On the other hand, they re less likely to gain as much as stocks over long periods.
Lower volatility makes bonds more attractive to investors as their holding period decreases.
Holding cash means investing in safe, highly liquid vehicles like savings accounts, money market accounts or certificates of deposit. There s no risk of losing your principal, however, the returns on cash investments have barely kept ahead of inflation. Earnings grow tax-deferred until you begin taking withdrawals in retirement, meaning your money grows much faster than it would in a comparable taxable account. Most employers match a portion of your contribution, giving you an immediate return on your money. An IRA lets you save for tomorrow while reducing taxes today.