World 9 · Investing & wealth building · Lesson 8 of 16

Bonds and cash equivalents

Lending money for interest, and the safer places people park money they may need soon.

7 min read · Level: Practical · Free — no account needed to read

The idea

A bond is a loan you make to a government or company. In return, the borrower usually pays you interest at set intervals and repays the original amount at the end of the bond’s term. Bonds are generally steadier than shares, but they still carry risk: the borrower may fail to repay, and when interest rates rise, the market value of existing bonds usually falls.

Cash equivalents are very safe, very liquid places to hold money for short periods: savings accounts, short-term deposits and similar holdings. They protect the value you put in and are easy to reach, but they grow slowly and can lose ground to inflation over long periods.

In a mix of investments, bonds and cash often play the role of stabiliser: they tend to hold their value better when shares fall, and they provide money that can be reached without selling shares at a bad time.

Why it matters

Understanding bonds and cash helps you balance growth with stability, especially as a goal gets closer and there is less time to recover from a fall.

A real example

The situation

Five years from retirement, Hamid still has almost all his retirement savings in shares.

What happened

A sharp market fall reduces his savings just as he plans to start drawing on them. His colleague, who had gradually shifted part of her savings into bonds and cash over the previous decade, is affected much less.

The takeaway

Adding stabilisers as the goal approached protected money that no longer had time to recover.

How people actually behave

People tend to think of bonds as boring and cash as wasteful, and so underweight the stability they provide — until a fall shows why it matters.

Common mistakes

• Assuming bonds can never lose value.
• Keeping long-term money entirely in cash.
• Keeping near-term money entirely in shares.

Questions to think about

• Which of your goals is close enough that stability matters more than growth?
• How would you want your mix to change as a goal gets closer?

Try it: Stabiliser check

1. For each goal, note how many years remain.
2. Decide what share of each goal’s money you would want in steadier assets.
3. Compare that with how the money is actually held.

Words in this lesson

• Bond — A loan you make to a government or company, which usually pays you interest and returns the original amount at the end of its term.
• Yield — The income an investment produces, usually as a yearly percentage of its price.
• Cash equivalent — A very safe, very liquid holding that can be turned into cash quickly with little change in value, such as a short-term deposit.