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Fixed Income Investing

August 14, 2012

When investing, there are some common choices for a safe and reasonable interest return.  Right now, none are good.

Insured bank certificates of deposit currently provide yields of about 0.5% for 1 year and about 1.5% for 5 years.  Neither keeps up with inflation.  Treasury Bills or Bonds have even lower yields.  If you want absolute safety, you probably should not go out further than one year to keep opportunities open and principal safe. 

Bond funds come with the high risk of declining market values when rates increase.  I would stay away from them (See my blog dated Feb 24, 2012 for my views why I do not recommend bond funds).

Individual bonds with definite maturity dates present market value risks and risks of default.  If your intention is to hold the bonds until maturity, you will not be affected by, or should be concerned with, the fluctuations in the market values since you will receive the bond’s face at maturity while continuing to receive the stated interest.  However, to get a reasonable yield, you might have to acquire bonds with maturities of twenty or more years.  This will provide higher returns for the next few years.  But if rates eventually rise greatly, you will be locked into the rates you get now (possibly reducing your future opportunities for the then market rates.)  You can preserve some opportunities by laddering the purchases so they come due at various intervals during the future term.  One way of reducing your default risk is to limit individual bond purchases so your fixed income allocation will comprise at least 10 to 15 bonds.  Risks of default can also be minimized by buying higher rated bonds and diversifying by issuer and industry.

Immediate annuities or charity gift annuities are two investments that provide higher guaranteed fixed cash flow in exchange for not being able to get your money back.  However, where a cash flow guarantee is important, this could be a good choice for a portion (up to 20%) of your fixed income portfolio.

There are other ways to invest for fixed income, but these are the more common and most secure.  Right now the market seems to be more concerned with safety of principal rather than yield.  If current yield is important, consider some of the alternatives mentioned above.

2 Comments leave one →
  1. August 14, 2012 7:49 pm

    Ed – I agree, there are few good choices in the investment world right now. Coincidentally, I examine some of the technicalities of charitable gift annuities my blog post this week; Tools & Techniques 101 – Charitable Gift Annuities ( Check it out!


  1. Creating a Laddered Bond Portfolio « The Partners' Network

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