Why not invest in fixed income?
Liquidity risk
As the main disadvantage of this type of investment, we can mention that its profitability is the lowest in the financial market. While higher risk may lead to higher profit, many investors choose to go the secured path, even if it means less reward.
You can also benefit from the tax advantages some fixed-income investments offer, such as municipal bonds. Some fixed-income investments are also fairly liquid. So, if you plan on using the money within a few years, a fixed-income investment can provide stable growth while keeping your money secure.
Fixed income risks occur due to the unpredictability of the market. Risks can impact the market value and cash flows from the security. The major risks include interest rate, reinvestment, call/prepayment, credit, inflation, liquidity, exchange rate, volatility, political, event, and sector risks.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.
Fixed-income securities usually have low price volatility risk. Some fixed-income securities are guaranteed by the government providing a safer return for investors. Cons: Fixed-income securities have credit risk, so the issuer could possibly default on making the interest payments or paying back the principal.
The pros and cons of fixed-income investing
Bonds are much less volatile than equities, so you won't see some of the wild price fluctuations you see with growth equities. Possible disadvantages include lower potential returns, susceptibility to inflation and interest-rate risk.
Equity markets offer higher expected returns than fixed-income markets, but they also carry higher risk. Equity market investors are typically more interested in capital appreciation and pursue more aggressive strategies than fixed-income market investors.
Interest rates tend to begin to decline three months ahead of recessions and reach a cycle low about five months into recessions. During economic downturns, fixed income has been shown to provide diversification benefits and reduce the volatility of portfolios that include risk assets such as equities.
Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.
Is fixed income high risk?
Fixed-income securities from the U.S. Treasury are backed by the full faith and credit of the United States government, making them very low-risk but relatively low-return investments.
Fixed-income investing is generally a conservative strategy where returns are generated from low-risk securities that pay predictable interest. Since the risk is lower, the interest coupon payments are also, usually, lower as well.
Put differently, if a fixed income ETF is trading at a premium, investors might be concerned about a potential "baked in" loss upon sale. However, if the premium is consistent, the risk of that baked-in loss is mitigated.
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule.
Certificates of deposit, or CDs, are fixed income investments that generally pay a set rate of interest over a fixed time period.
Fixed-income securities and equities are popular investments with millions of investors in the United States. Fixed-income investments pay regular interest and tend to have less risk, making them favorable to risk-averse investors. Equities, on the other hand, can have high returns, but also tend to be riskier.
Less reliable pricing data, higher transaction costs, and security fragmentation and availability issues in credit markets are among several challenges to implementing factor-based fixed income strategies.
For investors, equity investments offer relatively higher returns than fixed income instruments. However, higher returns are accompanied by higher risks, which are made up of systematic risks and unsystematic risks.
When investing in stocks, you have a greater chance of higher gains compared to fixed income products. However, there's also a lot more risk involved. There are zero guarantees with equity markets, so you could lose your initial investment if you choose the wrong products.
Why would a risk averse type of investor prefer fixed-income over equities?
Risk-averse investors focus on preserving their capital, so they are less willing to take risks for the potential of more significant gains. Investors who are risk averse may favor fixed-income assets such as bonds or stocks with lower volatility, among others.
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
Healthcare Providers
If any industry can be said to be recession-proof, it's healthcare. People get sick in good times and bad, so the healthcare industry isn't likely to have the same level of cutbacks or job losses that other less essential businesses may experience.
Options to consider include federal bond funds, municipal bond funds, taxable corporate funds, money market funds, dividend funds, utilities mutual funds, large-cap funds, and hedge funds.
As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.
