Fixed income assets are utilized in client portfolios in order to provide stability as well as interest income. Conditions have been challenging for investors for a significant period of time given the low interest rate environment. This is underscored by historically low interest rates from the Federal Reserve.
While interest rates likely will be increasing, it is expected that rates will likely be lower for longer than many people expect. For that reason, crafting a fixed income strategy and financial planning in Lafayette has become more difficult. The right fixed income strategy marries two concepts together in order to provide an optimum of return relative to risk.
The first concept is maturity and duration of fixed income to be held. Traditionally, the longer the maturity, the higher the interest rate paid. However, as interest rates rise, longer duration fixed income assets are more negatively impacted. Therefore, it is important that duration analysis occur prior to investing in a particular fixed income position.
The second issue that impacts fixed income is credit quality. Higher-rated quality fixed income assets tend to pay lower rates to provide investors more certainty in terms of overall returns. This certainty comes at a cost as higher-rated securities pay less yield than lower-rated assets. Lower-rated fixed income positions oftentimes called junk bonds pay higher yields but with more principal risk as there is less certainty that these companies will be able to fulfill future obligations.
The right investment mix depends on the comfort level of an investor regarding risk and volatility as well as the desired yield. Fixed income portfolios should be constructed based on each client's unique conditions and comfort level, and for that reason, a simple blanket approach is oftentimes ineffective in allowing investors to construct an appropriate strategy for their own personal situation.
If you would like more information, do not hesitate to contact Destination Wealth Management.
Destination Wealth Management is a client-centered wealth management firm that offers investment management, financial planning, and a holistic approach towards helping our clients in Lafayette succeed throughout every important life transition.