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Those buying low‐grade corporate bonds from companies with shaky financial foundations can certainly lose money. To entice investors, such companies offer higher than average interest rates. For example, assume a new technology company needs money for research and development. It might issue a bond with a 10 percent coupon, which is well above typical rates. But if the company goes bankrupt, investors might lose some or all of their original capital. It could get flushed down the toilet, along with the company's future.

Likewise, investors loading up on long‐term bonds can lose money in real terms. Remember that a real return is the profit made after inflation. If investors bought bonds maturing in 20 years with coupons of 3 percent per year, inflation could devour the profits. Sure, they would still earn 3 percent per year on their investment. But if inflation averaged 4 percent, the investor's real return would be negative. Such interest payments would lose to the rising price of a box of corn flakes.

That's why I recommend shorter term or broad market government bond index funds. Every year you'll see a “Bonds Are Going to Crash” headline. They might quote some crazy banker whose mother dropped him on his head.

In Figure 1.2, you can see the sleepiness of a broad US government bond index. The roller‐coaster line on top is the S&P 500 (VFINX). You should be able to see the stock market crash of 1987, the crash of 2002–2003, the crash of 2008–2009 and the mid‐2020 dip. The line below it represents Vanguard's US Bond Market Index (VBMFX) with all interest reinvested. Compared to the stock market's movement, government bond index funds don't crash.

Figure 1.2 Bonds Are More Stable Than Stocks

SOURCE: Vanguard.com.

Patience, diversification, and low investment costs are keys to large profits in the stock and bond markets. To earn such returns, however, investors must avoid the industry's traps. Let me show you how.