Fixed Income Investments: 3 Things to Know

By Thomas Beirne III, CFP®
Vice President, Senior Wealth Planning Officer
and Business Development Manager
Washington Trust Wealth Management

Are fixed income investments a good fit for your portfolio?

In general, fixed income investments –- including treasury bonds and bills, municipal bonds, corporate bonds, and certificates of deposit (CDs) — are designed to preserve capital and generate a stream of interest income over a set period of time.

Here are three things to know about fixed income investments:

1. They can help ease the pain of a bearish market. Bonds are an essential component of a well-diversified portfolio. Bond prices typically, but not always, move in the opposite direction of stock prices, which is particularly desirable during a shaky market. Today, with fixed income yields at their most attractive in ten years, investment in additional high-quality, short-term bonds may help ease the sting of the sluggish market, just as they did in the 2008 collapse. Having a diversified portfolio of stocks, bonds, and other assets is the best protection against a downturn.
2. They are not without risk. While fixed income investments generally represent the safer part of a balanced portfolio, they still carry risk. Apart from U.S. Treasury bonds and bank-issued CDs, all bonds carry some degree of credit risk, meaning that the bond issuer could default on one or more payments before the bond reaches maturity. In addition, until maturity a bond’s price will move higher and lower with changes in market interest rates. The need to sell prior to maturity could result in a realized loss, or gain.
3. It’s risky to go it alone. While on the surface, fixed income investments may appear less complex than equities, it is important to work with a qualified wealth advisor to avoid missteps and incorporate investments into a sound, long-term financial strategy. Just as you diversify with equities, you need to diversify with fixed income. Your wealth advisor knows you, your financial goals, your personal tax situation, and your risk tolerance. They are watching the markets and yields and can help you determine the best investment for your portfolio.

Helpful fixed income investment terms:

• Coupon rate: a bond's annual interest rate, expressed as a percentage of the bond's face value.
• Interest rate risk: the possibility that a rise in interest rates will cause the value of the bonds to decline.
• Maturity vs. duration: A bond's maturity is the length of time until the principal must be paid back (e.g., a 10-year bond will earn interest for 10 years from the date it is purchased). A bond’s duration is shorter and tells investors (in years) the economic lifetime of a bond, particularly related to interest-rate movements.Yield to maturity: the rate of return an investor receives if an investment is held to the maturity date.
• Yield to worst: the lowest potential yield that can be received on a bond without the issuer defaulting.