Investors looking to diversify their holdings – craft portfolios with varying investments with different expected risks and returns – may want to consider fixed-income investing, especially if they are close to retirement. That calls for first understanding the types, strategies, challenges, and advantages of such investments. With that in mind, here is a guide to fixed-income investing.
Particularly popular among those nearing retirement, fixed-income investing aims at producing consistent, known, fixed payments through lower-risk investments.
Such investment assets often include certificates of deposit (CDs), money market funds, municipal and corporate bonds, and Treasury bonds and bills, which are generally less risky than investments such as stocks.
While not risk free, fixed-income assets are often prioritized as the Golden Years approach, since retirees often must depend on their investments for consistent income and do not wish to actively trade based on price changes.
As an example of such an investment, say a company issues a 5% bond with a $1,000 face value that will mature in five years, meaning the investor who buys it will not be repaid until five years past. Over those years, the company makes interest payments based on an annual 5% rate. Thus, the investor gets $50 annually for five years. Once five years are up, the investor gets the original $1,000 investment on the bond’s maturity date. Some fixed-income investments make payments monthly, quarterly, or semiannually.
All told, fixed-income investing can be a viable choice if someone is living on, yes, a fixed income and seeking to maximize savings with predictable returns. It can also help the investor avoid a constantly changing stock market, which can provide peace of mind.
The ultimate goal of fixed-income investing — itself a conservative strategy — is to diversify investments. Fixed-income investments are frequently intermingled with stock investments to establish a more modern portfolio that is less vulnerable to constant market fluctuations.
Stock investments do offer growth over time, but at the expense of volatility. Thus, holdings that contain a mix of both types could meet short- as well as long-term investor needs. How much of a portfolio that should be dedicated to fixed-income products hinges on the investor’s investment style.
Those interested in fixed-income investing have a broad range of products from which to choose, including:
Before deciding on a fixed-income investment approach it is advisable that investors ask themselves how soon they are expected to get their original investment back, and while their money is invested, how frequently they wish to be paid. Once those questions have been answered, the investor can then invest their capital with the goal of regular interest payments during retirement to cover their living expenses.
Common strategies include:
There is no risk-free investment, and that goes for fixed-income investing too. Top risks include:
There are a number of benefits to fixed-income investments, including:
Diversify Your Portfolio Outside of Traditional Assets
Yes, the potential advantages of fixed-income investing are manifold. However, alternative assets are increasingly popular, as investors seek relief from an inherently volatile stock market. Not only do alternatives tend to protect against inflation, and have tax advantages, but they have low correlation to public markets.
That means prospects of steady, secondary income. After all, private markets have performed better than stocks in every economic downturn since 2008. In the last eight years alone, private market opportunities have provided a net annualized return of 9.75, compared to 6.5% in annualized returns for holdings of stocks and bonds.
An alternative platform on which nearly $4 billion has been invested to date, Yieldstreet is also increasingly popular. It has the most expansive selection of asset classes, with highly vetted offerings in art, real estate, transportation, private credit, structured notes, and more.
Alternative investments also offer another essential benefit: portfolio diversification. Mixing investment holdings with various types can not only potentially improve returns but can reduce overall portfolio risk. In fact, diversifying one’s holdings is key to long-term investing success.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $5000.
Despite the risks — and factoring in an investor’s time horizon and risk tolerance — fixed-income investing can lend some stability to a portfolio mostly made up of stocks, since such assets carry a generally lower risk than equities.
Such investments, as well as in alternative classes, can also be a good way to diversify holdings.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.