Summary List Placement
Fixed-income investing is a strategy in which the name of the game is income. It aims to provide investors with a steady cash stream, like a regular paycheck. It’s a conservative approach — in fact, it’s often considered one the safest ways to invest, avoiding the risky equities market — and the volatile highs and lows of stock trading — in favor of other vehicles, usually government or corporate bonds (debt securities).
For these reasons, fixed-income investing is often favored by people towards the end of their careers, who are looking to cash in, rather than to grow, their portfolios. But it can benefit anyone who’s in need of extra money, or who wants to diversify their investment mix.
What is fixed-income investing?
In the simplest terms, fixed-income investments are those that provide a regular and often predetermined payout, generally in the form of interest or dividend payments. They are fixed in the sense that they don’t fluctuate, either in the amount or the timing of their payments.
Income investing — and fixed-income investing in particular — is the opposite of growth investing. The sort of assets that generate steady money tend not to be the type that’ll appreciate in value much. On the other hand, they (usually) won’t go down; they offer financial security, especially if you hold onto them.
It’s like the difference between placing a standing order to buy a dozen roses each year and planting a rose bush. With the former, you know that you’re getting 12 roses — no more, but no less. With the latter, you may get many dozens of roses, but a harsh winter could kill your plant, leaving you with no blooms at all.
Types of fixed-income investments
There are several types of fixed-income investments. Their payouts vary, but the rates all tend to be higher than those of the average savings account. Here are the most common:
When people think of fixed-income investments, bonds are usually the first thing that comes to mind. Government bonds, like US Treasuries, are the most common. Other types include corporate bonds and municipal bonds.
In most cases, you can think of these sorts of fixed-income investments like a loan: The borrower is the bond’s issuer, and the investor, rather than a financial institution, is the lender. A bond has a set lifespan; when it eventually matures, the investor gets back what they initially paid along with added interest along the way.
With short-term bonds, that could happen in one to four years. With long-term bonds, it could take as long as 10 to 20 years. Treasury bills can even mature in less than a year.
Let’s say you purchase a fixed-rate T-bond for $1000 with an interest rate of 1.25%. If the bond matures in 30 years, you will receive $12.50 every year (or more realistically, $6.25 every six months because T-bonds have semiannual coupon payments). Overall, you can expect to make $375 on top of your initial investment.
Of course, not all bonds make it to …read more
Source:: Business Insider