January 11, 2021
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
Just this last week, I was asked, “are bonds only airbags for the foreseeable future”? My instinctive response I’m sure, had a lot to do with understanding the real underlying significance of what could be perceived as a dismissive market induced paradox. I knew the question was invoked due to the dismal puny yields available in this low rate environment. However, the question can be akin to asking, “is water “just” a hydrating substance”?
Simply, “yes”, water is just a hydrating substance… but a substance vital to one’s survival. And “yes” bonds may “just” be airbags for your investment portfolio but the power of the analogy should resonate fixed income’s importance! Fixed income remains the core component and foundation of wealth preservation regardless of the current interest rate environment.
I hope you never need to employ your car airbags because if you do, you are potentially in a catastrophic situation of survival. In the same manner, I hope your fixed income is held to maturity and remains untouched until maturity, quietly protecting your wealth in the background. Additional income is a bonus and we all hope that fixed income is not needed in an emergency situation, but if it is, we are all thankful it is supporting our investment needs.
This environment makes it easy to drift from disciplined investing. Interest rates are near historic lows and the stock market is breaking records seemingly every week. As you accumulate more wealth with rising stock prices, continually correct allocations by protecting that newly acquired wealth with fixed income.
When you shop for a car, the salesperson rarely talks about the impact capacity of the bumpers, the deployment time of the airbags or the functionality of the seat belts. He’s busy demonstrating the top speed, highlighting the horsepower, demonstrating the speaker quality, showing off the sunroof and having you sit in the plush leather seats. Yet all the bells and whistles don’t diminish the absolute necessity of the safety features.
It is not always fun to talk about bonds because they don’t build your wealth the way stocks, MLPs, real estate or your business does. But when the markets correct, or a pandemic limits your business’s effectiveness, having your fixed income airbag in place is vital to your investment health and sometimes survival. Please don’t lose sight of the importance of fixed income allocation no matter how distracting the markets can cloud things.
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.
Markets & Investing February 23, 2024 Review the latest Weekly Headings by CIO Larry Adam. Key...
Economy & Policy February 23, 2024 Will there be a partial U.S. government shutdown? Managing Director,...