Final answer:
True. Investors often start with stocks for higher potential returns and as they age shift towards bonds or stable dividend-paying stocks to reduce risk and ensure income stability for retirement.
Step-by-step explanation:
The statement that most investors put a heavy emphasis on stocks at an early stage in life and gradually shift toward bonds or stocks of stable firms that pay high dividends later in life is True. Young investors typically have a longer time horizon, which allows them to tolerate the higher volatility and take advantage of the potentially higher returns that stocks can offer over the long term.
As they get closer to retirement, the priority often shifts towards preserving capital and generating steady income, which is where bonds and dividend-paying stocks come into play. This investment strategy aligns with the concept of a reducing risk profile as one ages.
Through a sustained period, stocks have historically provided higher average returns compared to bonds and savings accounts. However, stocks also present greater risk in the short term, evidenced by significant fluctuations, such as the notable rise and fall of the S&P 500 in 2008 and 2009.
Bonds offer more stable returns and are less volatile than stocks but offer higher returns compared to a savings account. The choice between these investment types should consider the trade-offs between risk and return relative to an investor's life stage.