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One of the more heated debates that goes on in the world of income investing is whether stocks should be favored, or whether bonds should be the investment of choice. As always, what you do depends on your personal situation, and what you are comfortable with. A financial professional can also help you chart your course. But it does help to take a look at some of the basics of bonds and stocks when trying to make your decision.

Bonds

Bonds are considered safer than stocks. They are normally fairly reliable, especially U.S. government bonds. Even some corporate and municipal bonds are reasonably reliable (while offering higher returns than Treasuries). Unfortunately, bond returns are relatively low, to go along with this lower risk. In many cases, your income from bonds is eroded by inflation. On top of that, right now bond interest is taxed at your income rate — which means that between taxes and inflation your income could be very low indeed. Investing in TIPS can actually help you combat the effects of inflation, though.

Stocks

The Motley Fool points out that over time, stocks outperform bonds in most cases:

Over long periods, stocks have outperformed bonds. Period. They have done so more than 95% of the time in the 20-year periods between 1871 and 2006.

Another valid point is the fact that there are dividend-paying stocks that provide even more income on top of returns from stock increases. Dividends are also taxed at a lower rate, capping out at 15%. (Buy and hold investors can also enjoy the the tax efficiency of long term capital gains.) And if you use DRIPs, you can reinvest your dividends free of charge — it’s like using free money to buy more shares. You can adjust this down the road as you need the income.

In the end, some diversity in your holdings is a good thing. But don’t be so concerned about the stock market that you overweight your investment portfolio with bonds and neglect the advantages that can come your way through stocks.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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One of main features of day trading is profit taking. Today, profit taking is a major reason that the Dow is slumping in a direction that could very well take it back below the 10,000 mark. In profit taking, the goal is to get out when you have profits. In most cases, these profits are not necessarily large. They are often small, as investors take what they make to avoid the chance of loss later on. (The opposite of this is running profits, in which you try to keep going in the hopes that your profits will get bigger and bigger, attempting to sell just before the investment turns around.)

Profit taking is a strategy that can be used with most investments. Day traders use it with stocks, and it is a very popular technique for active forex traders. Some commodities and futures traders use profit taking as well. Profit taking is a way to ensure that your losses are limited, since you get out as soon as a position is profitable for you, whether than waiting to see whether things get better. You end up with a lot of small profits, rather than one huge payoff. On the other hand, you are less likely to sustain large losses, which is a very definite risk of running profits.

It is important to be careful when you use profit taking as an integral part of your investment strategy. Every time you place a trade, you end up having to pay some sort of a transaction fee. And, of course, the taxes on short term capital gains is larger than the taxes you pay on long term capital gains. So if you are not careful, your profits can be eaten away by taxes and fees.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Image by Getty Images via Daylife

As the Dow moves back above the 10,000 level today, some are looking at the effects of economic stimulus on different sectors. As might be expected, reports MarketWatch, housing and manufacturing have been benefiting from efforts to stimulate the economy, according to the Fed’s Beige Book:

“Not surprisingly, the two sectors the book highlights as ‘leading the more positive sector reports among districts’ were real estate and manufacturing, among the hardest hit sectors of the economy and the two benefiting the most from government support,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co.

The Beige Book “supports the notion that the U.S. economy is experiencing a slow recovery, with significant aid from government stimulus programs such as the first-time homebuyer credit and the recently expired cash for clunkers,” said Nicholas Colas, ConvergEx chief market strategist.

Clearly, there is a long way to go in terms of economic recovery. But the stock market is an indication that investors, at least, are hopeful that economic recovery on the way. Well, sort of. Today’s stock market earnings are almost exclusively in the form of the Dow. The S&P 500 is barely managing to stay in the black, and the Nasdaq is lower. But earnings have been providing a measure of confidence and optimism. And the fact that there still remains close to 80% of the stimulus to spend means that the government is likely to find more sectors to prop up in the future, in the hopes of buoying up the economy.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.