Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
The first question to answer is, “Why do I buy fixed income?” For many of us, it is because of one or several of the following reasons:
- I’ve accumulated my wealth via my business, stock portfolio, real estate, and/or other growth investments. I simply do not want to lose it.
- My risk tolerance is weighted towards growth, but I am not “betting” my entire position and relying on uninterrupted appreciation.
- I’ve made it. My lifetime plan was to accumulate enough money to retire and live my lifestyle. I’m there and I am not interested in risking having to do it all over again.
- I realize that the right fixed income choices can balance the growth assets in my portfolio, thus mitigating extreme portfolio volatility that keeps me up at night.
If one or more of these objectives apply, you have indirectly answered: “why buy fixed income with interest rates at historic lows?”
Fixed income investors have experienced the benefits of a prolonged declining interest rate environment. Recall that as interest rates decline, bond prices rise. Thus, falling rates provided a beneficial total return (the combination of interest income plus price appreciation) outcome. Although that has been a wonderful side benefit for portfolios, many of us maintain our primary objective of principal protection. In our current economic cycle, interest rates are at or near historic lows. Price appreciation is far less likely to support higher total returns in the near future.
We all want to be paid high returns with little or no risk, but the reality is that high returns often come with elevated risks whereas reducing risk often results in weaker returns. Finding the balance that is right for you can deliver a positive long term difference.
Timing the market is less of a required art for fixed income. Fixed income investing necessitates long term planning typically with a buy-and-hold discipline. Interim price movement during the holding period of a bond held to maturity has no effect on its income.
In an ideal world, our portfolio’s fixed income allocation accumulates attractive interest returns. Current market conditions might not provide desired returns. This condition is not permanent and does not imply that investors should completely deviate from their long term plan.
- This is NOT a time to change your risk profile and add unjustifiable risk.
- Fixed income “alternatives” are NOT fixed income and carry different risks without providing the needed characteristics of bonds.
- Reaching for yield may push you farther away from your portfolio goals.
Portfolio discipline implores us to remember why we buy fixed income and therefore validate why we continue to assign an appropriate allocation of our portfolio’s assets to fixed income, regardless of where interest rates stand.
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 investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
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.
Family & Lifestyle Review your eligibility for benefits programs and get organized for the year. Winter...