Fixed Income Investment Guide

Multiple effective strategies to fixed income investing are used by successful investors in 2022. Read a detailed fixed income investment guide for 2022.

Investing is full of risks. A fixed income investment is a conservative approach to investing, which mitigates those risks by promising a fixed return over a set period of years. Multiple effective strategies to fixed income investing are utilized by successful investors in 2022. Numerous types of fixed income investment products are also available on the market today.

What are the main reasons one would invest in fixed income products? What are the basics of fixed income investing, including common mistakes to avoid and strategies to employ? Conducting thorough research and gaining deeper insight into the basics of fixed income helps you make the best decisions possible for your portfolio. Read ahead for an informative fixed income investment guide for 2022.

Fixed Income Investments 101 - Basic Concepts

A fixed income investment refers to an investment made in a set amount, which pays fixed interest returns or dividend payments to the investor. Each fixed income investment lasts for a specified number of years. The conclusion of the investment term is referred to as its maturity date. Upon maturity of a fixed income investment the investor is reimbursed his or her original investment amount, which is officially referred to as the principal. For example, if an investment of $5,000 is made into a fixed income product, $5,000 is returned to the investor upon maturity of the investment.

Profits pursuant to fixed income products are specified in advance. Interest rate payments and dividend payments are the two types of profit-earning options. Interest rate payments, also referred to as coupon payments, are paid to the investor in addition to the reimbursement of the principal investment. A five percent bond of $5,000 with a five-year maturity date pays $250/year for five years (a total of $1,250 profit). Fixed income coupon payments are sometimes paid in monthly, quarterly, or semiannual installments as well.

Dividend payments are set in predetermined monthly, quarterly, or annual installment amounts. The installment amounts can increase or decreasing based on market conditions and/or company profits/losses. Dividend payments are beneficial for creating supplementary income and/or reinvesting into additional dividend stock shares. Certain dividend types such as Dividend Aristocrats and Dividend Kings are designed to increase payment amounts over time under successful conditions.

Why Invest in Fixed Income?

Multiple viable reasons for investing in fixed income exist today. Fixed income is a conservative approach to investing because it offers information on profits/returns in advance and reduces risk of losses. For example, publicly traded stocks on the New York Stock Exchange (NYSE) and Nasdaq markets are prone to risks and fluctuation from a struggling economy and geopolitical incidents. Fixed income investments offer a stabilizing diversification because they are less likely to be adversely affected by such macroeconomic risks, however. Fixed income investments are also able to offset losses experienced by other investment types when the market does fluctuate.

A primary benefit of fixed income investments is the protection they offer your principal investment. This type of protection is referred to as capital preservation, which is uncommon in many other investment products. Certain types of fixed income such as municipal bonds are exempt from taxation. Additional reasons to invest in fixed income products include:

  • Regular payment intervals.
  • Generation of supplementary and/or retirement income.
  • Possibly higher returns when increased interest rate/credit risk is assumed by the investor.

Fixed Income Investments - What Are the Risks?

One common risk associated with fixed income investing is the loss of your principal’s value due to inflation. Inflation causes fixed income investments to lose value from their initial investment date through to maturity. Assuming more interest rate/credit risk as a means of generating more profit also creates an increased risk of loss.

Rising interest rates cause a decrease in the value of bonds. Corporate bonds involve credit risk, which is also referred to as business/financial risk. When the issuer of a fixed income investment product defaults on his or her obligation to pay, the credit risk results in the loss of some or all your principal. Finally, when an investor needs to liquidate a fixed income investment, finding a new purchaser to assume the investment is not always possible.

How to Avoid Common Errors Investors Make Today

Many investors make common errors throughout their careers and portfolios. Understanding what these errors are helps you avoid making the same ones, which improves your overall market performance and results. Perhaps the most common error made by investors today is to not spend enough time researching and understanding an investment prior to making it. The best way to avoid this mistake is to diversify your portfolio with exchange traded fund (EFT) and/or mutual fund investments. This is a significantly better strategy than investing in individual stocks with business models unfamiliar to you. Therefore, when choosing to invest in an individual stock be certain to research it thoroughly prior to making any commitments.

Avoid investing in a company based solely on emotional attachment to it or its products. If a company is not doing well in the market you will still lose money on it regardless of your feelings. Stable and patient growth is also a way to avoid common errors and losses. Rushing into or out of an investment decision is often a mistake, which causes disappointing unnecessary losses. Avoid rapid turnover caused by moving in and out of investments too quickly and paying excessive transaction fees. Build your portfolio based on asset allocation instead of attempting to predict market timing. Successfully engaging in the latter approach is a challenge even for master-level investors and a common error made overall. Finally, do not hold onto losing investments waiting for it to return to even. Sell before you lose more money and allocate those funds toward a better performing investment.

Best Fixed Income Product Options to Buy

Fixed income options are categorized by both type and specific investment products. For example, online savings accounts are currently paying between 0.50 and 0.80 percent APY. Certificate of deposits (CDs), high-yield bond ETFs, defined-maturity bond ETFs, mutual bonds and corporate bonds are all viable types of fixed income investment types. Examples of a few top-tier fixed income products to buy include:

  • Vanguard Short-Term Corporate Bond ETF (ticker: VCSH)
  • DFA Short-Term Extended Quality Portfolio (DFEQX).
  • Fidelity U.S. Bond Index Fund (FXNAX).
  • FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (TDTF).
  • Invesco National AMT-Free Municipal Bond ETF (PZA).