Predictability, Stability, and Control
Fixed Income Investing
"Explore the world of Fixed Income Investing - predictable income with relatively stable returns and less risk".
What is it?
Fixed income investing refers to investing in securities that pay a fixed rate of return, such as bonds or other debt instruments. These investments are considered to be less risky than stocks or other forms of equity investing, as the return on investment is known in advance and typically* does not fluctuate as much with market conditions.
The benefits of investing in fixed income
Depending on your financial and investment goals, fixed income investments can offer a number of benefits including, but not limited to:
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Stability and predictability: Fixed income investments offer a fixed rate of return, providing a stable and predictable stream of income for investors.
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Less risk: Compared to equity investing, fixed income investing is considered to be less risky, as the return on investment is known in advance and typically does not fluctuate with market conditions.
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Diversification: Investing in fixed income securities can help diversify an investment portfolio, reducing the overall risk and increasing the potential for returns.
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Creditworthiness: Fixed income investments like bonds are issued by entities like government, corporations and municipalities, and the creditworthiness of these entities is often evaluated by credit rating agencies, which can help investors to understand the risk of default.
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Tax benefits: Some fixed income investments like municipal bonds are tax-free at the federal level, which can help investors save money on taxes.
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Liquidity: Fixed income securities are often tradable in secondary markets, which means that they can be easily bought and sold, providing investors with liquidity.
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Risk management: Fixed income investments can provide an opportunity for investors to manage their risk by choosing the right securities that match their risk tolerance and investment goals.
In summary, fixed income investing can provide stability, predictability, diversification and liquidity, while reducing the risk of losing capital. It's also a great way to manage risk and take advantage of tax benefits*.
Risks associated with investing in fixed income
There are seven major risks associated with investing in fixed income:
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Interest rate risk: Fixed income investments pay a fixed rate of return, and when interest rates rise, the value of these investments can decrease. This can be particularly problematic for long-term bonds, which can experience significant losses when interest rates rise.
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Credit risk: Fixed income investments like bonds are issued by various entities, such as governments, corporations, and municipalities. These entities can default on their debt, which can cause the value of the bond to decrease and the investor to lose money.
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Inflation risk: Fixed income investments pay a fixed rate of return, and when inflation is high, the purchasing power of that return can decrease.
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Liquidity risk: Some fixed income securities are illiquid and may be difficult to sell on the secondary market, which can make it difficult for investors to access their money.
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Duration risk: Bonds with longer maturities generally pay higher interest rates, but they also carry more risk. When interest rates rise, the value of long-term bonds falls more than the value of short-term bonds.
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Reinvestment risk: When a bond matures, the investor may need to reinvest the proceeds into another bond with a lower interest rate. This can result in a lower overall return on investment.
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Currency risk: Some of the fixed income securities are issued in foreign currencies, which means that the value of the investment can be affected by the fluctuation of the currency exchange rate.
It's important for investors to understand these risks and to manage them by diversifying their portfolio accordingly.
Fixed Income Strategies
1 / Buy and Hold Strategy
This strategy involves purchasing fixed income securities and holding onto them for an extended period of time, rather than actively trading them. The goal is to generate a steady stream of income through the interest payments and to benefit from the stability and predictability of fixed income investments.
2 / Laddering Strategy
This strategy involves purchasing bonds with different maturities, so that as some bonds mature, others can be reinvested at a higher interest rate. This strategy can help to mitigate interest rate risk and provide a steady stream of income.
3 / Yield Curve Strategy
This strategy involves investing in bonds with different maturities based on the current shape of the yield curve. The goal is to take advantage of the different yields available across different maturities and to generate a higher return on investment.
4 / Credit risk strategy
This strategy involves investing in bonds with different credit ratings, in order to take advantage of the different yields available and to diversify the portfolio's risk. The goal is to balance the risk and return of the portfolio by investing in bonds with different credit ratings.
5 / Short-term bond strategy:
This strategy involves investing in bonds with shorter maturities, which tend to be less sensitive to interest rate changes. The goal is to minimize the interest rate risk and to generate a steady stream of income.
6 / Inflation-protected bond strategy
This strategy involves investing in bonds that are designed to protect the value of the investment against inflation. The goal is to protect the purchasing power of the investment and to generate a steady stream of income.
7 / Floating rate bond strategy
This strategy involves investing in bonds with variable interest rates that fluctuate with market conditions. The goal is to take advantage of the floating rate of interest and to generate a steady stream of income.
8 / Municipal bond strategy
This strategy involves investing in bonds issued by municipalities, which may provide a tax-free stream of income for investors. The goal is to take advantage of the tax benefits offered by municipal bonds and to generate a steady stream of income.
How to invest in fixed income
Through direct investment in individual bonds, or mutual funds and ETFs, investors can get the exposure they need to diversify the portfolio and find the level of predictable income with limited risk they are looking for.
It's possible for an individual investor to buy individual bonds or other fixed income security, however it requires a significant amount of assets to build a diversified portfolio of individual bond. However, we can help you build your portfolio of fixed income securities with a combination of individual bonds, ETFs and mutual funds.
Please, click on the button below to get more information on how to build your diversified fixed income portfolio.