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Four Reasons Fixed Income Looks Attractive

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Stock TickersAs investors, we want to put our money in a place where it is safe yet works for us. It’s especially difficult to find the balance when the investment markets move hundreds of points in a single day and sometimes within a single hour. Even more financially depressing is the reported lost decade for stocks, the idea that over the past 10 years, no money has been made for buy and hold equities investors.

If you have had a substantial portion of your investment dollars in stocks like Apple, Amazon, or Green Mountain Coffee, your lost decade hasn’t been lost at all but for those who have a substantial portion of money invested in index funds, they know all too well about the lost decade. Less than five years ago bonds, preferred stock, and other fixed income holdings were barely given a second look by growth investors but all of that has changed in less than five years. Is a portfolio with a much higher weighting of fixed income investments the best move right now? Here are four reasons why the answer may be, yes.

Global Concerns

You don’t have to be up in your years to remember a time when the happenings of economies on the other side of the globe were barely on your radar screen. What was happening in European nations was barely a consideration even when investing in multinational companies. Today, most sophisticated investors can name the financial decision makers in the Euro area nations and when the Greek Parliament votes on an economic proposal U.S. markets move.

This heightened globalization in the world’s investment markets has made it much more difficult for investors of all skill levels to find stocks that consistently move based on the fundamentals of the underlying company. Bonds offer the opportunity of a set income much more independent of market conditions.

Better Retail Payout

It’s true that stocks offer a potential for growth that is much higher than fixed income but for retail investors, those that don’t invest as a career, finding the right stocks and holding them through wild swings in the market has proven difficult. The five year performance for the retail investor is in the red for 8 out of 10 people which makes the 4% or higher return on highly rated corporate bonds quite attractive.

Fees

For many, their retirement funds are invested in a funds that are largely made up of actively managed mutual funds and because their employer may match a portion of their contributions, keeping the funds in these fee laden funds makes sense and is also required. For those with an IRA where the funds don’t have to be invested in mutual funds, bonds offer the same advantages without the large fees. Sure, there are the advisor’s fees if you use one, commission, and later, taxes, but those fees are still much less than some mutual funds.

Cash!

Cash isn’t much of an investment but if you’re an active stock market investor, making nothing while market conditions are unstable is better than losing money. There are three types of positions that an investor can take: Long positions, short positions, and no position. All of these have their place in an actively traded portfolio.

Active traders don’t like fixed income because they aren’t as exciting as stocks and ETFs but chasing the wild market swings isn’t profitable for most investors on a longer term basis. Every portfolio has room for some fixed income.

(Photo: thewalkingirony)

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7 Responses to “Four Reasons Fixed Income Looks Attractive”

  1. Bart says:

    Fixed income may look attractive to those who are seeking a safe haven, but I have a feeling that many have stretched their duration and gravitated toward lower quality bonds seeking higher yields in a low yield environment.

    When rates eventually rise, I think many in long duration funds will find out the ugly side of owning fixed income.

    I can’t think of any good reason to own a 10 year Treasury bond at 1.70% or 30 year Treasury at 2.75%

    • Tony says:

      There is a big difference between Bonds and Bond Funds. I would not invest in BondFunds at this time for the reasons you cited. Individual Bonds on the other hand offer good yields and there is no downside on principal as long as you keep the bond till maturity.

  2. A McDonald’s or P&G or Microsoft or …. yielding over 3% look more attractive than intermediate or long-term treasuries.

  3. If you’re going after fixed income look at ‘bump CDs.’ Since rates are so horrific for savers, you’ll want to keep your money in an account that is still liquid enough to manover it when key rates eventually rise again.

  4. LouisC says:

    It isn’t the “heightened globalization in the world’s investment markets” that has made it “much more difficult for investors of all skill levels” – it has always been difficult for an individual investor to make it in the stock market.

    Buy, hold, and rebalance, using a set asset allocation of low cost index bond and stock funds, tuned to your degree of risk tolerance, and ‘staying the course’ is the best strategy in any market condition. You are only fooling yourself if you believe you can outsmart the market, time allocations, or pick individual stocks better than institutions with billions of dollars and hundreds of staff researchers there to help only themselves and their top clients.

  5. dave says:

    You can get a guaranteed tax free return of 5% by paying off your mortgage which beats the lost decade

  6. timparker says:

    I disagree Louis…as years go by stocks are trading less on fundamentals and more on technicals. Globalization has introduced more variables in to market analysis. You don’t have to outsmart the market. I believe that the key is to stay on the sell side as much as possible. Sell covered calls and collect dividends.


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