Just a quick note: I'm sharing my perspective on stocks, bonds, and cash in Canada. This is general info to help you understand the basics, not personal financial advice for your situation.
Most people start with the same question: “I have some money saved. What do I do with it?”
You look at your savings account and see it earning almost nothing. Then you hear about the stock market and how people make a lot of money (or lose it). And then someone mentions bonds, which just sounds confusing.
It’s easy to get stuck.
The good news is that stocks, bonds, and cash are not as complex as they seem. They are just different tools for different jobs. Let’s break down what each one does.
1. Cash: The “Safety” Job
Cash is what you know best. It’s the money in your chequing account, your high-interest savings account (HISA), or in a GIC (Guaranteed Investment Certificate).
- The Good: It’s safe and stable. You know exactly how much you have. You need cash for your emergency fund and for any big purchases you plan to make in the next year or two.
- The Bad: It doesn’t grow. In fact, it slowly loses its buying power over time because of inflation. If inflation is 3% (as measured by the Bank of Canada), your cash needs to earn 3% just to stay even. Your savings account probably isn’t doing that.
Cash is great for short-term needs and safety. It’s not a long-term investment plan.
2. Bonds: The “Stability” Job
When you buy a bond, you are lending your money to a government or a large company. In return, they promise to pay you back in full on a specific date and pay you regular interest along the way.
- The Good: Bonds are the “ballast” for your portfolio. They are much less volatile than stocks. When stocks are crashing, bonds often hold their value or even go up, which helps smooth out the ride. They also provide predictable income.
- The Bad: The returns are lower than stocks. Bonds also have their own risks. If interest rates go up, the value of older bonds (with lower interest rates) typically goes down.
Think of bonds as a way to lower the overall risk of your investments. They add stability and are a good choice for money you might need in the medium term (like 3 to 10 years).
3. Stocks: The “Growth” Job
When you buy a stock (also called an equity), you are buying a tiny piece of a real company, like a bank, a grocery store, or a tech company. You become a part-owner.
- The Good: Over the long term, stocks have the highest potential for growth. They are the best tool we have to beat inflation and build real wealth.
- The Bad: This growth comes with high volatility. The price of stocks can swing wildly. It’s normal for the market to drop 10%, 20%, or even more. This is why stocks are only for money you don’t need for a long time (at least 5 to 10 years, but preferably longer).
I remember when I bought my first stock. I checked the price every day. It was stressful. I learned that stocks are not for “getting rich quick.” They are for “getting wealthy slowly” by letting companies grow over decades.
At a Glance: The Three Tools
Here’s a simple way to think about them:
| Asset | Primary Role | Risk | Potential Return |
| Cash | Safety / Liquidity | Very Low | Very Low (often negative after inflation) |
| Bonds | Stability / Income | Low to Medium | Low to Medium |
| Stocks | Growth | High | High |
The Real Answer: You Need a Mix
So, which one is best? Stocks? Bonds? Cash?
This is a trick question. You don’t pick one. You use a mix of all three.
This mix is called your “asset allocation,” and it’s the most important investment decision you will make. Your perfect mix depends on two simple things:
- Your Time Horizon: When do you need the money?
- Long-term (10+ years): You can take more risk and hold mostly stocks.
- Short-term (0-3 years): You need safety and should hold mostly cash or GICs.
- Medium-term (3-10 years): A balanced mix of bonds and stocks makes sense.
- Your Risk Tolerance: How would you feel if your investments dropped 20%?
- If you would panic and sell, you need more bonds and cash.
- If you would see it as a buying opportunity, you can handle more stocks.
- Be honest with yourself. As author Morgan Housel says, the key is being able to stick with your plan.
A Canadian Twist: Where to Hold Your Mix
In Canada, we have two amazing tools to protect our investments from taxes: the TFSA and the RRSP.
These are not investments. They are “shelters” that you put your investments into.
- TFSA (Tax-Free Savings Account): This is a must-use account. You put money in (that you already paid tax on), and all the growth—from stocks, bonds, or GICs—is 100% tax-free, forever. You can find the official rules on the CRA website for TFSAs.
- RRSP (Registered Retirement Savings Plan): This is a retirement tool. You put money in before paying tax on it, which means you get a tax refund now. The money grows tax-deferred, but you pay tax on it when you withdraw it in retirement (when your income is likely lower). Here is the CRA guide for RRSPs.
You can hold stocks, bonds, and cash inside both your TFSA and your RRSP. The goal is to fill these accounts first to protect your growth from taxes. See: TFSA vs. RRSP: Which Savings Account Is Right for You?
So, What’s the Main Point?
The most important thing to remember is that stocks, bonds, and cash aren’t competing. They are teammates that do different jobs.
- Stocks are your engine for growth.
- Bonds are your brakes for stability.
- Cash is your emergency fund and your fuel for short-term goals.
Your job is to build a mix that fits your own timeline and lets you sleep at night.
Next Step: If you’re new to this, your next step could be to learn more about How to Diversify Your Investment Portfolio: A Beginner’s Guide or What Are Index Funds and ETFs, and Why Should Canadians Invest in Them?
Full Disclaimer
This article is for informational and educational purposes only. I am not a financial advisor, and this is not financial advice. The information provided is general in nature and may not be suitable for your specific circumstances. All investing involves risk, and you could lose money. You should always do your own research and consider consulting with a qualified professional before making any financial decisions.
