EQR Securities- What Are The Pros & Cons Of Fixed Income Investing?

Fixed income investments, bonds, in particular, can serve a wide array of uses for all types of investors, but they also have a few drawbacks. Let us look at both the main benefits and the downside to investing in this particular asset class.

Reliable Cash Streams

When interest rates are minimal in a low inflation environment, bonds offer low-risk investors the highest and most reliable fixed rates of return.

Diversification

The greater the diversification in an investor’s portfolio, the greater the risk returns will be. It is an old cliché ‘’ Don’t put all your eggs in one basket’’, but it as applicable today than it ever was.

Safety

In an equity market bubble fuelled by low-interest rates, bonds offer safety in addition to reducing volatility and preserving capital.

The Provision of Legal Protection

Bondholders are classified as legal creditors during bankruptcy proceedings, and take creditor priority over shareholders in claims against an insolvent company’s assets. Furthermore, structured bonds receive priority over unsecured and subordinated bonds.

Clear Ratings

With the exception of the subprime mortgage fiasco over a decade ago, the main rating agencies such as S&P and Moody’s, serve as a great confirmer as to a bond’s level of risk. This in itself provides investors with more assurance when picking a bond.

Now let us consider the downside to fixed income investing –

Versus Shares

Investment returns are fixed. Having a fixed return is both a blessing and a drawback when compared to equity market investing.

Large Investment Ticket

Many bonds require a large investment acquisition cost making them unreachable for a low investment portfolio value investors. 

Lack of Liquidity

Okay, bonds issued by governments of established economies, together with triple-A-rated corporate bonds are highly liquid. However, bonds issued by up-and-coming small companies are not, as fewer investors are willing to buy them.

Exposure to Interest Rate Risk

Central bank base interest rates affect the value of bonds more directly than compared to stocks. For example, when base rates go up, the value of corporate and government bonds reduce. Conversely, when bond prices fall, their yields increase, but remember the higher the yield, the higher the risk.

So if you are looking for stability and confirmed expectations, a government-issued bond, or triple-A-rated bond should form part of your investment portfolio. A low-risk guaranteed income, above and beyond both bank deposit rates and inflation, is always a welcomed component to any astute investor’s portfolio.

With various tips from EQR Securities, you can successfully invest and propel in your investment decision while painting a low-risk profile for every investment.