Top Tips for Fixed Income Investors
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By :
Morgan Petersen
Submitted
2010-01-30 15:23:06 |
There are many reasons to consider fixed-income investments. One is that they add diversification to an investor's portfolio. Fixed-income investment can provide a good balancing tool for your portfolio. Fixed-income investments are securities that provide regular interest or dividend payments and, in many cases, a return of principal at maturity. Fixed-income investments provide a level of safety and comfort that is simply not available in other investment securities such as stocks.
Here are some of the tips if you are considering fixed income investment strategies:
Understanding the RisksWhether you're a experienced investor or a new bee, You must have a good understanding of the risks involved in investing. All investments have risks, including fixed-income securities. To earn a higher return, for example, an investor may need to consider bonds from a less creditworthy issuer. If you remember the dotcom bust, you probably know that some of the corporate bonds with good return were worthless and were sold for pennies for a dollar. You don't want to get caught with a investment that can lead to a substantial loss of your principal.
Beware of GuaranteesEven with a portfolio of Treasury securities, an investor can lose money via interest rate risk. Beware of promises that "you can never lose principal." You can and there are plenty of example to prove that. Consult your financial advisor if you are not sure about the bonds you are considering for investment. If you don't have a financial or investment advisor, you can always go online and research the offer and read the feedback and comments that other investors may have posted.
Stagger Your PortfolioStagger the purchase of bonds, CDs, and Treasury securities to spread out the tax owed and expose only a portion of your portfolio to interest rate changes at any one time. You don't want to be in just one line of fixed income investment. Some of the investors have even considered "Gold" as an option in a uncertain market and it has worked out great.
Use Bonds to Hedge Stock InvestmentsHave your cake and eat it too. Buy a zero-coupon bond to guarantee the return of principal and use the balance of principal to invest in ownership assets (e.g., stock). Stocks market investment has a higher risk so you want to hedge your investment with securities that have a low risk and decent return.
Match Your Investments with Financial GoalsInvest with a goal in mind. For example, use a 2-year Treasury note for an upcoming car purchase or an 8-year zero-coupon bond for a child's education. Goals should always be in line with your time frame. For example, there is no reason to invest in 5 or 10 year treasury bonds if you need that cash next year for a home purchase.
There are many reasons to consider fixed-income investments. One is that they add diversification to an investor's portfolio. Fixed-income investment can provide a good balancing tool for your portfolio. If you're nearing retirement and need a income component from your retirement funds or savings, Fixed-income investment is the way to go. This is a great option for current or near retirees who seek regular income to supplement a pension and/or Social Security. Investing in just one asset class (e.g., stock, bonds, or cash), however, is less desirable than selecting a combination of assets because doing so increases investment risk. It's like the old saying "Don't put all of your eggs in one basket." By combining investments that are affected differently by economic events, investment risk is reduced. While both stocks and bonds often are similarly affected by interest rates in the short run today, over the long term they have had a relatively low relationship to each other.
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Article From Fiscalwealth | Personal Finances, Investment and Wealth Management
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