Investments can be a secure source of fixed income. However, just like any other endeavor that involves money, there is also a probably that investments can result in a loss instead, especially if you do not research ahead and study the current market status and the techniques you can employ to maximize the benefits.
So what is fixed income? Fixed income is a type of investment that provides a steady flow of periodic income at regular intervals and at predictable rates. The returns from fixed income are from the dividends and interest produced from low-risk securities.
Fixed income investments are less risky than the other types of investments. In fact, because of the stable returns they offer, fixed income investments are common with individuals who have retired or those who are approaching the retirement age. However, getting a fixed income should not only be your goal for your retirement years. It can also be used for you to meet your other financial goals, such paying for your children’s education, growing your investments further, or even repaying a loan.
With today’s fast-paced stock market, fixed income still promises stable and higher returns. In this article, you will learn how to manage your investments to preserve your capital and generate a fixed income.
How Do You Build Fixed Income?
Individual bonds, bond mutual funds, money market funds, and certificates of deposit are only some of the many ways to build your fixed income portfolio. In general, these types of investments offer low but stable returns. Your options are not only limited to these, however. Here are ways you can manage your investments to get a fixed income.
1. High-Yield Bonds
Also called “junk bonds,” high-yield bonds are a great way to grow your fixed income portfolio. It may be difficult for an individual to invest in these products, but you can allocate a portion of your funds to get high-yield bonds and increase your returns.
If you are new to investing in high-yield bonds, note that many of these bonds will be closed-end. This means that the trade price may be higher than the net asset value. Conservative investors should look for a fund with little to no premium over the net asset value to lower risk.
2. Do not be afraid to go long-term
Be a bold investor. Locking your investments into longer terms with higher interest can help you earn higher income. This way, you get stable and higher returns even if the interest rates decrease. However, it is important to note that before you make long-term investments, you should have enough funds for emergencies and short-term needs, or else making a long-term investment is just going to defeat the purpose. You might end up borrowing money for your short-term needs!
Additionally, always remember that in a fixed-term investment, you do not get the principal back before it matures. If you decide to sell it on the secondary market before it matures, there is a great chance you will incur a loss. To avoid this, try to look for investments that offer tenures that match the period for which you need the income. For instance, a bond that has a 10-year fixed term could be a great investment for those parents who might need the income for their child’s education in ten years.
3. Learn the Laddering Strategy
When you invest in a bond, you are basically stuck to the stipulated interest rate for its entire duration. For example, if you invest $50,000 with an interest rate of 2.5% for two years, the interest will not fluctuate within that two-year period. This means that if you do not have any other funds to use for other investments, you will have no way to make additional investments within that period. How is this bad? Well, other investments with higher interest rates may become available within that two year period, and it’s going to be an opportunity for loss if you do not take advantage of better returns.
Using the laddering strategy, an accounts manager can use the principal amount of the matured bonds to reinvest in bonds that offer higher rates. For instance, your $10,000 can be split into a two or three-year bond. When the bond matures two years after, the principal can be rolled into another bond with a term of three years. This gives many investors the opportunity to take full advantage of the increasing interest rates as time goes by.
Staggering, or laddering, allows you to diversify your investments into different tenures. This is great as the short-term investments would mature early and will be available for reinvesting in products with higher rates. If the interest rate does fall, there will be a minimal impact on your portfolio as you can control how much you reinvest. The more you diversify, the more flexibility you have when it comes to making future investments to take advantage of better interest rates. Just remember, the more rungs in the ladder you want to get, the bigger the fund and the greater the commitment you will need.
4. Do Not Limit Yourself to Debt Products
Don’t forget about equities. Investing in stable equities that offer high dividends can help you build a balanced portfolio. The good thing is, equities are a great option for those who are already in their retirement years or even those who just started growing their portfolio.
Equities help you fight fluctuating inflation rates. Many stable companies even offer yields that are in excess of the current inflation rates. Plus, you will be given the chance to participate in the profit growth of the companies you are investing in.
But how do you find these companies? Well, you can get a simple stock screener. This tool will help you find companies that offer stability and high dividends. This is a great investment option for those conservative individuals looking for low-risk investments.
5. Invest in Real Estate
Owning a property and putting it up for rent can provide you a steady flow of inflation-protected income in the coming years. Although buying properties involves a large amount of money, the income you can get from the rental can be used for other investments, especially if the mortgage is paid.
While owning rental properties is a great way to build your fixed income portfolio, there is actually something better than becoming a landlord. Investing in REITs or real estate investment trusts are high-yielding securities. The difference between becoming a landlord and investing in REITs is that the latter are liquid and are traded like stocks. They are a great way to diversify your fixed-income portfolio and protect it from risks and the fluctuating market.
6. Do Not Forget About Asset Appreciation
As an investor looking to build a fixed-income portfolio, don’t forget that capital appreciation in equity or gold can also produce a steady flow of income. The technique is to determine and set target levels for appreciation for each asset class, and then sell when you reach the target. This way will allow you to realize only the profit, but it is a low-risk way of generating income and protecting the profits if the prices go down.
7. Consider Inflation-Protected Securities
TIPS or Treasury Inflation-Protected Securities, as the name suggests, protect your funds from inflating rates in the future. They are offered with modest coupon rates.
One great benefit of these types of securities is that the price is regularly and systematically adjusted to keep pace with the current inflation rates.
8. Emerging Market Debt
Similar to high-yield products, emerging market bonds are best when invested through exchange-traded funds or mutual funds. Individual bonds may not be liquid and can be hard to manage, especially if you are a new investor. However, historical data shows that yields have been higher than advanced-economy debt. Much like high-yield bonds, emerging market debts are closed-end, so get the ones that have reasonable rates compared to their NAV or net asset value.
The techniques and strategies we enumerated above may not be applicable to all. The age, stage, and profile of investors have to be considered when investing. It is encouraged that you constantly rebalance your fixed-income portfolio strategy to the current market conditions and your personal preferences.
Nowadays, it is very important for investors to study about and research different types of assets to ensure high and steady returns, decrease risk, and protect their funds from inflation. There is no cookie-cutter formula for investing. You have to be flexible and find what suits your needs and goals. But, as they say, never put your eggs in one basket.