The world of investing makes many paths available, and knowing where to put your money can be challenging. As you build long-term financial strategies for you and your family, fixed income investments can be a sound option offering stability and predictable returns.
What are fixed income investments?
Fixed income investments are securities that provide a regular income in the form of interest payments. These investments come in several different forms, including bonds, certificates of deposit (CDs) and Treasury inflation-protected securities (TIPS). They are typically less risky than other types of investments, such as stocks and commodities, making them a good choice for conservative investors.
Here's a closer look at some examples of fixed income investments.
Certificates of deposit
Treasury inflation-protected securities
How do fixed income investments work?
Fixed income investments typically have a
What are the benefits of adding fixed income investments to your portfolio?
Fixed income investments offer several potential benefits, depending on your financial goals.
1. Income generation
Some investments don't generate income until you sell them and receive capital gains. Fixed income investments, on the other hand, pay regular interest. This steady and predictable flow of income can be especially helpful for retirees looking to supplement their monthly income in retirement.
2. Portfolio diversification
Adding fixed income investments to your portfolio can help
3. Capital preservation
Fixed income investments are also a strong way to preserve capital. While they typically offer smaller returns than high-growth investments, they tend to hold their value. For this reason, they may appeal to people close to or in retirement.
Since fixed income investments are well-regarded among investors, they generally can easily be liquidated for cash. If you need money or simply want to free up cash for another investment, you can usually sell your shares relatively easily.
Are fixed income investments safe? What are the risks?
Although fixed income investments tend to be less risky than other types of investments, there is still some inherent risk involved. These risks generally fall into four categories.
1. Inflation risk
One of the most significant risks is
2. Credit risk
Credit risk marks another potential issue surrounding fixed income investments. This occurs when the issuer of the investment is unable or unwilling to make interest or principal payments when they come due. For example, this could happen if the issuer experiences financial difficulties or declares bankruptcy.
3. Interest rate risk
Bond prices and interest rates have an inverse relationship. With fixed income investments, an increase in interest rates can cause the price of bonds to decline.
4. Liquidity risk
Liquidity risk is the possibility that an investor will not be able to sell an investment reasonably quickly at or near its current market value. This can stem from a number of factors, such as low trading volume or a volatile market. Liquidity can be of particular concern with certain types of fixed income investments such as individual bonds, since they're often not as liquid as other types of investments such as stocks or mutual funds.
For example, an investor may not be able to sell a bond on the secondary market for the same price they paid for it. Similarly, if they want to cash out a CD before the maturity date, they may have to pay a penalty. This can make it difficult for investors to access the full value of their fixed income investments on short notice.
Staying aware of these risks can help you avoid potential pitfalls when investing in fixed income securities. By assessing your own comfort with risk and diversifying investments within your portfolio, you can manage your level of exposure to them.
Get in touch with a financial advisor
Fixed income securities can offer investors stability and predictability in their portfolios, but it's essential to understand exactly how they may fit into your larger financial picture before deciding where to put your money. For guidance on this topic or other financial planning needs, connect with a local