Fixed-income investments – Security during volatile markets

While equities are often the primary focus for long-term investment portfolios, the unpredictable nature of global markets has prompted a return to fixed-income investments. These investments, known for their stability, offer a reliable source of income and a shield against market volatility.

 What are Fixed-income investments?

These investments pay investors a fixed interest or dividend until a maturity date. The most common are government and corporate bonds. On maturity, the principal amount is returned. The fixed-income investment payments are known in advance and remain fixed throughout the investment term.

For cautious or conservative investors, fixed-income investments are valuable for portfolio diversification and risk reduction. While these securities may offer lower returns compared to equities, they also come with lower risk, providing a balanced investment strategy.

Companies and governments issue debt securities to raise money to fund large projects and run day-to-day operations. In exchange for investors lending them money, the companies or governments agree to pay a fixed rate of return. For example, a company may issue a 4% bond of £1000 over five years. The investor buys the bond and will only receive their initial investment back after five years. This means that every year, for five years, the investor receives £40 and their initial £1000 back at the end.

While it is good to have security in investing, over-investing in secure fixed-income products could drastically reduce your interest-earning potential. Always speak to a financial advisor regarding investment decisions and maintain a diversified and balanced portfolio to protect capital and ensure maximum returns.

Apart from fixed-income securities, ETFs (exchange-traded funds) and mutual funds are also available.

Types of Fixed income investing

There are various types of fixed-income investments, including certificates of deposit, treasury bills, treasury notes, treasury bonds, municipal bonds, and corporate bonds.

Benefits of Fixed income investments

  • Income generation

It generates income for investors through regular coupons that could occur quarterly, bi-annually or annually.

·       More security and less volatility

Fixed-income investments reduce the volatility of equities by incorporating a less risky bond component. The guaranteed payouts eliminate uncertainty and offer a more secure investment, reducing the risk of possible losses.

·       Guaranteed income

A fixed-yield investment guarantees a payout over a certain period, e.g., a treasury or government bond that guarantees an annual payout of 5% per annum in exchange for a fixed-term loan. So, a 5-year fixed-yield investment would pay out 25% over five years, along with the original capital invested at the end of the term.

Capital preservation

As professionals near retirement age, their portfolios are generally converted from a riskier, higher-interest-earning format to a lower-risk, lower-interest format. This is done to preserve the capital already invested, so there is a lower risk of losses.

The last thing a person nearing retirement wants is to lose money on their retirement savings, which may affect their retirement lifestyle.

For example, a portfolio that is more aggressive to encourage higher returns to build wealth (70% equities and 30% bonds) would be moved to a conservative or balanced level (50% equities and 50% bonds) to lower the risk of any volatility or losses, thus preserving current capital for retirement.

Another form of fixed-income investments is fixed-yield or structured investments.

What are Fixed-yield/High-yield investments or Structured notes?

High yield is a term for any investments or savings that offer higher-than-average or inflation-beating returns. Higher-earning investments usually have a higher risk. Always let your financial

advisor review the risks of any potential high-yield investment

Fixed-yield investments or structured products are suited to those investors with a lump sum who would like to earn a fixed income on a deposit, as they provide a steady income stream and more stable returns. This fixed return depends on specific market conditions, such as a major market maintaining 80% of its value. 80% would be the coupon barrier. This value differs from structured product to product. Investors could receive a fixed return known as coupons, which are generally paid quarterly. Some structured or fixed-yield products also offer a memory feature that will pay back any missed coupons due to a market dip when the markets return above the coupon barrier.

A structured note is commonly linked to the performance of one or several indices, such as the FTSE 500, S&P500, Nasdaq, or Euro Stoxx, or the performance of several equities, such as Tesla, Meta, Nvidia, Shell, and PayPal, for example.

The various notes can follow the cautious end of the spectrum at around 3-5.5% per annum to balanced at around 5-10% and growth at around 10% and above.

Benefits of Fixed-yield investments or Structured notes

Risk Reduction: Diversification allows you to balance the risk associated with individual investments. When one asset underperforms, others may compensate, leading to a more stable portfolio.

Potential for Increased Returns: By investing in a variety of assets, you increase the likelihood of capturing the growth potential of different sectors and markets.

Smoother Investment Journey: Diversification can lead to a smoother investment journey with reduced volatility, helping you stay the course during challenging market conditions.

Like any investment, there are risks, and investors should always consult a financial advisor before making investment decisions.

With volatility, it is wise to diversify into various asset classes. Investors are returning to fixed-income products like bonds and even gold for security and stability and adding them to their portfolios to remain diversified during economic turmoil.

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your advisor for a personal consultation.

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.