Bond
Definition
A loan you make to a government or company. You lend money, they promise to repay it with interest on specific dates. Bonds are more stable than stocks but have lower potential returns. Think of it as the 'boring but safe' part of a portfolio.
Why It Matters
Bonds reduce portfolio volatility. When stocks tank 20%, bonds might be flat or up slightly. They provide steady income and capital preservation, which is crucial as you near retirement. They're also less correlated to stocks, so they truly diversify.
Example
Buy a $10,000 government bond paying 4% annually for 10 years. You receive $400/year guaranteed and $10,000 back in 10 years. It's boring but predictable. Compare that to a stock that might return 10% or -20% yearly.