Balancing Risk with Fixed Income Investing

Jan 3, 2023 8:31:52 AM

For the last 15 years, investors have searched for yield beyond traditional income investments throughout the prolonged low-rate environment. Fixed-income investing is getting more attention and gaining traction as the market adjusts to elevated inflation, rising rates, and increased market volatility. 

What is Fixed Income Investing?  

Fixed-income investments are debt investments that pay a fixed rate of interest, along with the return of principal loaned upon maturity. They are historically less volatile than equities and, therefore, more conservative.

In comparison, equity securities come in the form of company stock. They represent a stake in the firm - not a debt. There is no maturity date. They may pay a dividend, but there are no guaranteed payments, and there is a higher risk/reward for these investments compared to a company bond.  

Many agree that the 60-40 model of investing is outdated. Equity forecasts are at historic lows. As a result, finding the right balance has never been more important, and knowing how to find that right balance of offense and defense can seem complicated and bewildering.   

Let's look at ways to help you get to that Goldilocks Zone - not too little or too much, but just right. Finding that balance is what will help you feel prepared for anything. 

With less inherent risk than stock investing, fixed income focuses on the principles of capital and income preservation by investing in money market funds, bonds, and CDs which can potentially provide steadier income over time.  

Protecting & growing gains

Your first step is to figure out where you are in your investment life cycle. Check out our blog, The Different Vintages of Investor Types, to see where you fit into this cycle. Based on your personal financial goals, fixed-income investments can provide many advantages, including:  

  1. Diversification from stock market risk - By allocating a portion of your portfolio to fixed-income investments, you can potentially offset losses when the stock market gets rocky.  
  2. Preservation of capital - While keeping an eye on inflation risks, Fixed Income typically carries less risk - making it a good investment option for investors approaching retirement age or who have less time to recover losses.  
  3. Total Return - Some fixed-income assets can generate attractive returns by assuming more credit or interest rate risk.  
  4. Income Generation - Fixed Income investments typically provide steady income streams. 

The Vineyard Global Advisors team is tactical. We strive to shift and balance, playing offense and defense, thus enhancing downside protection as well as upside participation.  

Are you an offensive player, or do you consider yourself more defensive? Do you feel prepared for volatility and unsteady returns? Do you have a plan? Finding balance is something for which we all strive. That moment where you feel like you are playing your "A" game, prepared to enjoy the good parts, and ready for anything that could knock you off your feet.  

When you take a moment to assess where you are in your investment life cycle, what do you think about retirement? Do you have a plan to shift from the accumulation phase to the protection phase? Of course, there comes a time in any game when taking significant risks pays off. Other times, the coach urges their athletes to "play it safe," minimizing risks to protect gains. Not too little, and not too much. Finding balance requires a look at the risk as well as the reward.  

Risk management

Fixed Income Investment Risk Management 

Fixed Income can be a great strategy, but as with any investment, risk management is essential. Here are four things to consider:  

  1. Liquidity risk - If an investor wants to sell a fixed-income asset, they may not be able to find a buyer  
  2. Inflation risk - In the case of bonds, the investor can lose some purchasing power if the inflation rate outpaces the fixed income amount.  
  3. Interest rate risk - Interest rate movements are a significant cause of price volatility in bond markets. -When interest rates rise, bond prices fall, causing the bonds to lose value.  
  4. Credit risk - Investing in corporate bonds carries the risk that the issuer might default on its debt obligation. This would result in an investor not recovering the full value of the principal investment.  

Investing in corporate bonds carries the risk that the issuer might default on its debt obligation.  

It can get confusing when looking for ways to participate in the return of fixed Income investing. For example, there may be high minimum investment requirements or transaction costs. There may also be a lack of liquidity if you go it alone.  

Finding an experienced manager is the best way to start, and the timing has never been better.  Actively managed accounts allow you to relax, knowing your team is in place - playing offense and defense with experience and skill.

Contact us to learn more about Vineyard Global Advisors' Investment Strategies or discuss themes in this post.  

Vineyard Global Advisors offers a range of investment strategies designed to allow participation in the market's growth within a dynamic, risk-managed framework that seeks to provide protection during significant market declines. Our goal is to give our clients greater peace of mind by generating steadier returns over time. 

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