Strategies for Diversifying Fixed Income (2024)

1. Anchor

   Anchor your portfolio with high-quality bonds

   Investors are often tempted to time markets as market dynamics change. Rather than abandoning bonds in favor of stocks, investors should focus on the role bonds play in a diversified portfolio—income, total return potential, and an offset to equity volatility.

   A CORE APPROACH

   Diversifying your portfolio with actively managed high-quality bonds may be an appropriate strategy as they can enhance total return potential by adjusting the amount of credit and interest rate risk. Historically, high-quality bonds have performed well when stocks have declined, and typically have provided steady income.

   Historically, bond returns have helped offset stock declines

   Bond returns in years when stocks were down, 1926–2021.

   See Also

   Financial Awards And Recognition | Why FidelityFidelity 500 Index (FXAIX) Performance History - Yahoo Finance

   • Source: Morningstar EnCorr and Fidelity Asset Allocation Research Team (AART), as of 12/31/21. Investment-grade bond returns are represented by the Bloomberg (BBg) U.S. Aggregate Bond Index from January 1976 and by a composite of the IA SBBI U.S. Intermediate-Term Government Bond Index (67%) and the IA SBBI U.S. Long-Term Corporate Bond Index (33%) from January 1926 through December 1975. Stock returns are represented by the performance of the S&P 500^® Index. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All market indices are unmanaged. Not intended to represent the performance of any Fidelity fund. See below for index information.
   • In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit, and default risks for both issuers and counterparties. (Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.)
   • Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.

2. Non-core

   Explore non-core income options

   In a low-yield environment, building a portfolio with the potential to generate income may mean exploring non-core income options.

   IMPROVE INCOME POTENTIAL

   For investors who can tolerate more risk, adding non-core income assets may offer higher income potential as well as diversification benefits such as lower sensitivity to rising rates.

   NON-CORE INCOME ASSETS INCLUDE

   • High-yield bonds
   • Emerging-market debt
   • Leveraged loans
   • Real estate securities

   In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit, and default risks for both issuers and counterparties. (Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.) Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. Floating rate loans generally are subject to restrictions on resale and sometimes trade infrequently in the secondary market; as a result they may be more difficult to value, buy, or sell. A floating rate loan may not be fully collateralized and therefore may decline significantly in value. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.

3. SHORT

   Use short-term bonds to help lessen interest rate sensitivity

   Seeking income, many investors have turned to long-term bonds. However, long-term bonds usually have greater sensitivity to rising interest rates.

   SHORTEN DURATION

   Diversifying with short-term bond funds may help reduce the impact of rising rates.

   Short-duration bonds generally hold their value better as rates rise

   Price declines in response to interest rate changes^

   • ^ Source: Fidelity Investments, modified adjusted duration data for Bloomberg (BBg) Indices sourced from Barclays Live on 6/30/17. The durations for 3–6 month bonds, 1–3 year bonds, and 10–20 year bonds are 0.37, 1.95, and 10.50 years and are represented by the 3–6 month component of the BBg Short Treasury Index and the 1–3 year and 10–20 year components of the BBg U.S. Treasury Index, respectively. This hypothetical example is an approximation that ignores the impact of convexity, speed of rate changes, and other market/technical factors. It assumes a simultaneous level shift in interest rates across the bond yield curve
   • Duration is a measure of a bond’s sensitivity to changes in interest rates. In general, bonds with shorter durations generally experience smaller price changes when interest rates move compared to longer-duration bonds.

4. Municipal

   Add municipal bonds

   Municipal bond funds have historically provided attractive benefits—tax-free federal income that can add total return and attractive diversification benefits—due to their low correlation to stocks and other fixed income investments.

   POTENTIALLY REDUCE VOLATILITY

   Investing in high-quality municipal bonds may reduce credit risk and volatility. Extensive credit research is instrumental in identifying financially sound issuers and potentially avoiding defaults.

   Even without adjusting for taxes, municipal bonds have outperformed taxable bonds 50% of the time over the last 15 years.^†

   • ^† Source: Bloomberg. For the period From 7/1/02–6/30/17, municipal bonds, represented by BBg Municipal Bond from Index, outperformed taxable bonds, represented by BBg U.S. Aggregate Bond Index, 103 out of 180 12-month rolling return periods (57.2%). The returns were not adjusted for tax considerations.
   • The municipal market is volatile and can be significantly affected by adverse tax, legislative, or political changes and the financial condition of the issuers of municipal securities.
   • Past performance is no guarantee of future results.
   • It is not possible to invest directly in an index. All indices are unmanaged. See below for index information.

Anchor your portfolio

• Fidelity Advisor Corporate Bond* (FCBIX)
• Fidelity Corporate Bond ETF (FCOR)
• Fidelity Corporate Bond (FCBFX)
• Fidelity Advisor Investment Grade Bond* (FGBPX)
• Fidelity Investment Grade Bond ETF (FIGB)
• Fidelity Investment Grade Bond (FBNDX)
• Fidelity Advisor Strategic Income* (FSRIX)
• Fidelity Strategic Income* (FSICX)
• Fidelity Advisor Total Bond* (FEPIX)
• Fidelity Total Bond (FTBFX)
• Fidelity Total Bond ETF (FBND)

Explore non-core income options

• Fidelity Advisor Floating Rate High Income (FFRIX)
• Fidelity Advisor High Income Advantage (FAHCX)
• Fidelity New Markets Income (FNMIX)
• Fidelity Advisor New Markets Income* (FGZMX)
• Fidelity Advisor Real Estate Income* (FRIRX)
• Fidelity Real Estate Income (FRIFX)

Shorten duration

• Fidelity Conservative Income Bond (FCNVX)
• Fidelity Floating Rate High Income (FFRHX)1
• Fidelity Advisor Limited Term Bond (EFIPX)
• Fidelity Limited Term Bond ETF (FLTB)
• Fidelity Limited Term Bond (FJRLX)2
• Fidelity Advisor Limited Term Municipal Income* (FISHX)
• Fidelity Limited Term Municipal Income (FSTFX)
• Fidelity Advisor Short Duration High Income* (FSFHX)
• Fidelity Short Duration High Income (FSAHX)
• Fidelity Advisor Short-Term Bond (FBNIX)
• Fidelity Low Duration Bond Factor ETF (FLDR)

Add municipal bonds

• Fidelity Advisor California Municipal Income* (FCMQX)
• Fidelity California Municipal Income (FCTFX)
• Fidelity New York Municipal Income (FTFMX)
• Fidelity Advisor Intermediate Municipal Income* (FZIIX)
• Fidelity Intermediate Municipal Income (FLTMX)
• Fidelity Advisor Municipal Income* (FMPIX)
• Fidelity Municipal Income (FHIGX)
• Fidelity Municipal Income 2015 (FMLCX)
• Fidelity Municipal Income 2017 (FMIFX)
• Fidelity Municipal Income 2019 (FMCFX)
• Fidelity Municipal Income 2021 (FOCFX)
• Fidelity Municipal Income 2023 (FCHPX)
• Fidelity Advisor Municipal Income 2025* (FAMYX)
• Fidelity Advisor New York Municipal Income* (FEMIX)

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