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Fixed Income Investment as a Strategy

Fixed income investing is 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. Building a fixed income portfolio may include investing in bonds, bond mutual funds, and certificates of deposit (CDs). One such strategy using fixed income products is called the laddering strategy.

A laddering strategy offers steady interest income through the investment in a series of short-term bonds. As bonds mature, the portfolio manager reinvests the returned principal into new short-term bonds extending the ladder. This method allows the investor to have access to ready capital and avoid losing out on rising market interest rates.

For example, a $60,000 investment could be divided into a one-year, two-year, and three-year bonds. The investor divides the $60,000 principle into three equal portions, investing $20,000 into each of the three bonds. When the one-year bond matures, the $20,000 principal will be rolled into a bond maturing one year after the original three-year holding. When the second bond matures those funds roll into a bond that extends the ladder for another year. In this way, the investor has a steady return of interest income and can take advantage of any higher interest rates.

Benefits of Fixed Income

Fixed income investments offer investors a steady stream of income over the life of the bond or debt instrument while simultaneously offering the issuer much-needed access to capital or money. Steady income let investors plan for spending, a reason these are popular products in retirement portfolios.

The interest payments from fixed income products can also help investors stabilize the risk-return in their investment portfolio—known as the market risk. For investors holding stocks, prices can fluctuate resulting in large gains or losses. The steady and stable interest payments from fixed income products can partly offset losses from the decline in stock prices. As a result, these safe investments help to diversify the risk of an investment portfolio.

Also, fixed income investments in the form of Treasury bonds (T-bonds) have the backing of the U.S. government. Fixed income CDs have Federal Deposit Insurance Corporation (FDIC) protection up to $250,000 per individual. Corporate bonds, while not insured are backed by the financial viability of the underlying company. Should a company declare bankruptcy or liquidation, bondholders have a higher claim on company assets than do common shareholders.

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