Balance is just as important in your portfolio as it is in riding a bike. For many investors, fixed-income investments can help achieve the desired balance by helping to reduce portfolio volatility and provide regular income.
Asset Allocation is Key
Fixed-income investments, including bonds, are an important component in diversifying your portfolio to help reduce investment risk, since bond prices and stock prices often move in opposite directions and bonds provide income. How you allocate your portfolio among stocks, bonds and cash will depend on your individual circumstances and financial goals, as well as how much risk you are willing
As part of the financial planning process, you’ll want to work with your financial advisor to develop an asset allocation plan customized to your needs. As your circumstances change over time, your financial advisor can work with you to adjust your asset allocation plan. For example, as you get closer to retirement, it may be important to increase your fixed income allocation to help reduce investment risk.
Broad Selection Available
Investors can choose from a wide variety of taxable and tax-exempt fixed-income instruments, including bonds issued by corporations, states, municipalities, FDIC-insured banks, federally sponsored agencies and U.S. Treasury securities. Maturities can range from short to long.
Investors might select bonds for their portfolios for a number of reasons, including:
- Help Reduce Risk. Bonds provide a steady income stream, known maturity date and have historically been less volatile than stocks.
- Liquidity/Secondary Market. Holders of fixed-income securities can sell their bonds in the secondary market. If bonds are sold prior to maturity, the investor receives the current market price, which may be more or less than their original cost, and may generate gains or losses. It is important to understand how the direction of interest rates might affect the value of a fixed-income investment. Bond prices fluctuate in response to changing interest rates. Prices increase when interest rates decline, and prices decline when interest rates rise.
- Steady Income. Bonds typically provide regular interest payments on specified dates.
- Rate of Income. Investors can select a rate of income that suits their individual needs. Percentage yields on bonds vary depending on their quality and changes in general interest rates.
- Variety and Diversification. Literally thousands of bonds are available from various issuers, with maturities as short as one month or as long as 50 years or more.
- Tax-Exempt Investing. Most municipal bonds are free of federal income taxes, and in some cases, from state and local taxes, although some municipal bonds considered tax-exempt or tax-free may still be subject to the Alternative Minimum Tax.
Review Allocations With Your Advisor
If your portfolio doesn’t include fixed-income investments, talk with your financial advisor to determine what role these securities should play in your portfolio. If your investments do include fixed-income securities, review your portfolio with your advisor on a regular basis to determine how current market conditions may affect your allocation mix and make the necessary adjustments. iBi