Bonds — The Safer Side of Your Portfolio
A bond is a loan you give to a government or corporation. They pay you interest (coupon) and return your principal at maturity. Think of it as the opposite of a bank loan — you are the lender.
Types of Bonds
Government Bonds: Safest. Treasury bonds, government securities. Lower returns (3-5%) but virtually zero default risk.
Corporate Bonds: Higher returns (4-8%) but some default risk. Investment-grade bonds are relatively safe.
Municipal Bonds: Often tax-free interest. Great for high-income investors.
Why Include Bonds?
Bonds reduce portfolio volatility. When stocks drop 30%, bonds might only drop 5% or even go up. A 60/40 stock-bond portfolio reduces risk significantly while still providing good long-term returns.
Rule of thumb: your age in bonds. Age 30 = 30% bonds. Age 50 = 50% bonds. Adjust based on risk tolerance.