Step 1: Identify Your Objectives - Butler Financial, LTD


Step 1: Identify Your Objectives

Drew O’Neil discusses fixed income market conditions and offers insight for bond investors.

Every dollar should be invested with some sort of intention. Let’s say you have $1,500,000 to invest, and you have decided to allocate $1,000,000 to equities and $500,000 to fixed income. The equity portion is probably earmarked for growth and allocated in an attempt to maximize upside potential while staying within your personal risk tolerance. For the fixed income piece, there is likely a particular reason other than growth that you have earmarked $500,000 for fixed income. Identifying that reason and making it priority #1 is a crucial first step in determining exactly how those dollars should be invested, as that reason will determine the types of investments that are appropriate and how the portfolio should be structured.

While there are an infinite number of reasons that an investor might decide to allocate a portion or all of their investible assets into fixed income, a few of the more common reasons are highlighted below, along with what that really means to most investors and how that helps dictate portfolio construction. Note that these are not mutually exclusive; many investors’ overall objective might span a range of these ideas, which all work together to form an ideal fixed income portfolio for that specific investor.

Wealth preservation. This investor has achieved a level of wealth to allow them to live the lifestyle that they choose. As the primary objective for this investor is principal preservation, overall credit quality of the portfolio is the primary focus. Income generation is always a desired benefit, but not at the expense of the primary goal. This investor should stick to their high-quality portfolio objective regardless of the income being generated, as the income is an ancillary benefit, not the primary objective.

Retirement income. This investor is already in or planning for retirement and plans to rely on the income generated from their fixed income investments to at least partially fund their retirement. There is generally some sort of cash flow target. When constructing a portfolio, coupon choice and maturity structure is probably very important. If an investor needs 4% cash flow off of their portfolio, that doesn’t mean they need bonds yielding 4%. Purchasing above-market coupons (5% coupon bond yielding 2%) might allow the investor to achieve the required cash flow levels. Yes, the bond will be priced at a premium and a portion of the cash flow is return of principal, but there is no rule that says you are not allowed to spend down some of your principal in retirement. Ensuring that cash flow targets are met is the primary goal. 

Hedge equity volatility. This investor wants their fixed income holdings to counter-balance the movement in their equities, hopefully creating stability in the portfolio as a whole (they want their fixed income to zig when their equities zag). Historically, the best way to do this is with higher duration, high-quality fixed income. Oftentimes, the initial thought is to invest in short-term bonds for portfolio stability because a lower duration means less price movement. In reality, this investor does not want a fixed income allocation that is not going to exhibit price movement, what they want is fixed income price movement in the opposite direction of their equities.

Funding a future purchase. This investor has identified a future need that they need to be able to fund. This could be anything from paying a grandchild’s college tuition to a vacation home purchase. Regardless of the reason, they have a known date in the future when they will need a certain amount of money available. Earning money along the way is an added benefit. Sometimes zero-coupon bonds are appropriate, especially if the investor wants to minimize the upfront investment. While other investors might want cash flow along the way and opt for coupon bearing bonds. Regardless of the type of bond, a high-quality investment that allows the investor to know exactly when and how much principal will be returned to them is the most important factor (something that cannot be achieve through a packaged product).

Total return. This is not your typical “buy-and-hold” investor that is common in fixed income. These fixed income dollars have been earmarked for growth rather than capital preservation and income. The line of thinking when investing for total returns aligns closely with equities, in that you are attempting to capitalize on price appreciation and are not necessarily investing for the known aspects of fixed income (known income, known cash flow, and known principal return). This is a more aggressive strategy that generally involves actively trading based on personal views about what will happen in the future.

Whatever the primary objective of your fixed income allocation, identifying that objective is an important first step in the investment process. All too often, investors think about things in the wrong order: a yield target is given, and then from there, the investor tries to figure out how they can achieve that yield given the current investment landscape. Often, the yield target is unrealistically high given an appropriate risk tolerance, and the investor ends up reaching into riskier investments than they probably should, all because they have identified an arbitrary yield goal that they want to achieve. Don’t sacrifice your primary objective in order to achieve a secondary objective.

To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of, FINRA’s “Smart Bond Investing” section of, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Other posts you might like
No fooling – a silver lining for investors

Markets & Investing April 01, 2024 Doug Drabik discusses fixed income market conditions and offers...

read more
March highlighted by markets rising to record highs

Markets & Investing April 01, 2024 Market rally driven by a broadening of the market and optimism that...

read more
The next level of play in the financial markets

Markets & Investing April 01, 2024 Raymond James CIO Larry Adam reminds investors they need to be well...

read more