When many people think of investing, the first thing that comes to mind is probably the stock market. That's not surprising, since stock price rises and falls are always in the news. But if you want to reach your financial goals, you may need to look beyond stocks and include fixed income investments in your portfolio.
Investing in bonds has three important benefits.
Income – Investing in fixed income instruments such as bonds, Treasury bills, and certificates of deposit (CDs) provides regular income in the form of interest payments. And you will continue to receive this income until your investment matures or you sell it, regardless of what is happening in the financial markets. Of course, the income you can receive from fixed income investments always depends on the interest rate at which these investments are issued. However, if you own a mix of long-term and short-term fixed income investments, you can get some protection against interest rate fluctuations. When market interest rates are low, you can usually, but not always, earn more income from long-term bonds that pay higher interest rates. Additionally, if market interest rates rise, you can reinvest the proceeds from short-term bonds to make a profit.
Diversification – If you own only stocks or stock-based mutual funds, your portfolio may be exposed to higher risk, especially during market downturns. However, adding fixed income investments to your holdings may help reduce the impact of market volatility. Bond prices often move in a different direction than stocks, so if stock prices are falling, you may find that your bonds are increasing in value. You can also diversify the fixed income portion of your portfolio by owning a mix of corporate bonds, government bonds, and CDs, to name a few.
Stability – As mentioned earlier, if you hold a bond to maturity, it will always pay you interest. However, if you want to sell the bond before maturity, you may receive more or less than the amount you originally paid. If market interest rates rise, the current price of a bond may fall. Because even if you get a new, higher-priced bond, no one will pay the full amount of the bond. This is called interest rate risk. Conversely, if market interest rates fall, the price of current bonds may rise. However, there are important points to remember here. Bond prices typically do not fluctuate as much as stock prices. In other words, bonds typically have less volatility than stocks. Therefore, owning bonds can add diversification to your portfolio. Additionally, to maximize the stabilizing effect of bonds, we recommend using high-quality bonds that are rated 'investment grade' by an independent bond rating agency.
How much of your portfolio should consist of fixed income investments? There's no one right answer for everyone. And over time, your interest in these types of investments can change. For example, as you approach retirement, you may want to consider shifting some of your growth-oriented investments to income-producing investments, even though you still need some growth. potential to keep up with inflation. In either case, the combination of income, diversification, and stability offered by bonds and similar securities should be compelling enough to find a place for them in your investment mix.
Jennifer Barrett, AAMS, is a local Edward Jones Financial Advisor.
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Edward Jones, its employees, and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult an estate planning attorney or qualified tax accountant regarding your situation.
This article was written by Edward Jones for use by local Edward Jones Financial Advisors.