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Aug 15, 2021 | Investment Management, Q&A

Q&A: What is the role of fixed income in a balanced portfolio?

Bond certificate image
Balanced portfolios combine various asset classes and investment strategies to balance an appropriate level of risk with an acceptable level of return. These portfolios often include a mix of equities (i.e. stocks) and fixed income (i.e. bonds). Historically, bonds have served three key purposes in balanced portfolios that we cover below.

While there are various fixed income strategies, we invest primarily in high-quality corporate bonds and will focus on these.

DIVERSIFICATION:

When the stock market is experiencing a correction, high-quality bonds offer non-correlated price action. Thus, including bonds in your portfolio will reduce your overall portfolio volatility. For example, a portfolio containing 50% stocks and 50% high-quality bonds would fare much better during a selloff in the stock market due to its diversification.

CAPITAL PRESERVATION:

In bonds with set maturity dates, barring an extreme negative credit event, an investor will receive the par value of the bond. Holding bonds to maturity removes concern over any price changes between the time of purchase and the maturity date.

INCOME GENERATION:

Bonds produce income in the form of coupon payments. The level of income achieved in fixed income varies greatly depending on the interest rate environment and various other economic factors. Historically, high quality corporate bonds have provided attractive real (inflation-adjusted) levels of income. However, the level of income that can be attained using bonds is currently limited.

Historically, and in a normal environment, fixed income investments have been used to provide an attractive and predictable income stream. Over the last several decades, fixed income yields have declined and provided little inflation-adjusted investment income. In addition, the Federal Reserve recently pushed bond yields lower to sustain the economy following the pandemic-induced recession. Despite the current low-yield environment, fixed income still plays an important role in a balanced portfolio. Your Wealth Management Advisor can work with you to determine the appropriate mix of equities and fixed income to temper the level of volatility in your portfolio and achieve your goals throughout retirement.

Author: Ephraim Ulmer | Wealth Management Advisor
Written: August 15, 2021