The importance of fixed-income investments is rising as it focuses on low-risk tools preserving both capital and income. They include government bonds, corporate bonds, CDs (Certificate of Deposit), and money market funds.
Fixed income assures a steady income with less risk compared to investments made in the stock market. There is a famous quote by investment expert Benjamin Graham: “Buy not on optimism, but arithmetic.” That could be a guide to make agile fixed-income investments.
Benefits of fixed income
Fixed income investments offer many potential benefits, including diversification from stock market risk. They are less sensitive to macroeconomic risks like economic downturns and geopolitical events that often lift and batter stocks and financial markets.
People seeking to grow wealth and investments to save for retirement hold a significant amount of stocks in the portfolio.
By allocating adequate space for fixed income investments in the portfolio losses from stock markets swings can be addressed. Salvaging capital means protecting the absolute value of investment via assets with the objective of fair return of principal.
Many investors on the verge of retirement look for safer investments that provide an income. Given the low risk, fixed income assets are a good choice for investors with less time to recoup losses although inflation will remain a risk.
Steady income with low risk
Fixed income investments generate a steady income at regular intervals like coupon payments on bond holdings. There are also municipal bonds where the income is free from taxes.
However, fixed-income investments are not without some risks. The main risk flows from a change in interest rates. When bond prices crash, investors suffer a loss of value to the bonds held. Interest rate movements are the major cause of price volatility in bond markets.
Inflation also hurts bond investors as the fixed amount from bonds will erode if inflation outpaces this amount and the investor will be pushed to a lower purchasing power.
Balancing risk and reward
However, risk and reward will continue correlated in the realm of investments. For greater wealth, risk-taking is inevitable without losing focus on ROI. The rate of return on investments must weigh high when investing in stocks and bonds but keeping it modest will be prudent.
A balanced investment portfolio will have a mix of 80 to 90 percent of stocks and bonds, with 10 to 20 percent in cash or cash equivalents.
Any intelligent wealth builder will try to leverage safe bets and stay free from risks. But risk-taking can be done within a safe zone by placing an upper limit for a comfortable losing.
According to an investing expert, more than ROI, it is the accumulation of net investable assets should matter more. This is the surplus left after paying all recurring expenses, including car, home, debts, and loans.
Individual investors chasing yields typically get ROIs less than half of the market averages. So, an astute wealth builder must devote a lion share of wealth-building to boost his income and set realistic goals for his stock and bond portfolios. Realism means expecting plus or minus 10 percent of the market averages.