Fixed Income Options

For the better part of two decades, the leading investment advice appeared to be ‘go for stocks.’ For millions of investors, ranging from low-volume casual investors to professionals aiming to squeeze as much as possible out of the market before its downturn, that advice didn’t quite work. The crisis of the past few years hurt many, but it hurt those with large stock market investments the most.

It’s interesting to look at the events leading up to such large losses, and see them as part of a larger picture. Brokers, those that dealt with everything from small accounts to major players, had pushed stock investments hard, causing many to invest heavily with expectations of constant returns to the tune of ten percent annually. As we now know, those returns weren’t quite as stable as expected.

In fact, many of those with excess stock market investments lost close to all of their investments over the past few years. It’s created a fairly new investment culture – one where the promises of constant, ‘stable’ returns on the market aren’t believed so frequently. It’s also created many former stock market investors that are looking for real security, and fighting hard to find it for themselves.

One of the most secure options for earning a constant return on your investment is found in fixed income options. These are accounts that, unlike the stock market, with its rapid gains and losses in value, are tied to a fixed overall income. Common fixed-income options include corporate bonds, particularly those that rank at a high investment grade and are highly unlikely to become bankrupt.

In this guide, we’ll be taking a look at many of the most popular fixed-income investment options, and discussing how they can form part of a diverse and risk-insulated investment portfolio. A fine source of financial balance, it’s essential that investors consider fixed-income options as part of an overall, stable investment portfolio, be it for short-term returns or long-term retirement security.

At the heart of fixed-income options are bonds, particularly those in public organizations such as municipalities and state organizations. Backed by the government in which they’re issued – often state governments – these bonds are issued as part of government project funding. In most cases, these bonds are used to pay for projects such as roadways, new facilities, and other public assets.

As such, they’re not the rapid cash-earners that stock market investments and equity investments can be. However, they’re also not the high-risk investments that the stock market is known for. A municipal bond investment is unlikely to earn more than five percent yield, but it’s also a secure, safe, and reliable investment, having the backing of a municipality rather than a public company.

Why does this make it a more secure investment option? Because municipalities, unlike companies, are required to raise income through local taxes in order to manage their bills. This backs your own investment against taxes not just on local economic performance, but on consumption. As a result, municipal bonds are an investment that’s both highly secure, and capable of producing good returns.

Despite the security of municipal bonds, it’s always possible that they’re not quite secure enough for some investors. That’s understandable – the last few years have revealed that even the most ‘secure’ investments can be the exact opposite. If municipal bonds, linked only to a local government, aren’t the dream investment you’ve been waiting for, it may be worth considering buying treasury bills.

Unlike municipal bonds, which are backed only by a small municipality, treasury bills are backed by the United States government – a fairly reliable investment guarantor. These bills aren’t a major cash earner, nor are they particularly lucrative investments. Nevertheless, they produce long-term income that’s stable and reliable, although it rarely exceeds a very low rate of financial return.

It’s important to consider opportunity cost when investing in low-yield fixed-income options such as treasury bonds. Yes, it’s highly likely that you’ll make a small return on your investment, but it’s also possible that, due to your assets being locked in the investment for several years, you end up losing money due to it being unavailable for other investments, most of which could produce better results.

That’s the dilemma with many of these low-risk, low-return fixed-income options, and one that an alarming amount of investors fail to adequately acknowledge. There’s a difference between having your money invested ‘safely’ and missing out on opportunities for real earnings. It’s a balance that’s difficult to fully satisfy, but it’s essential that your investments don’t fall too far to either one side.

This is why most investment experts recommend treating fixed-income options as part of a larger, much more balanced investment portfolio. While they can produce a more diverse range of assets for your portfolio, they’re not enough to make a portfolio on their own. In many cases, having all-bonds or all-bills portfolios can lose money due to inflation, rather than earning a secure return.

So consider not just the ‘secure’ nature of fixed-income options when purchasing them, but their place within a larger investment portfolio. Smart investing is a game of managing risk and return – one that many investors fail to manage effectively. By all means, invest in fixed-income options, however, don’t let them become an investment obstacle rather than a slow-burning portfolio asset.

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