Ten Reasons to Be Thankful For Bonds
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
Let’s face it, the last couple of years aren’t going to go down as marvelous, magnificent, or astonishing celebratory periods. COVID has flipped many of our routine undertakings completely upside down. Still, despite the discouraging moments and off-putting press, individual bonds endure the stress and provide abundantly ensuring qualities that can allow investors a good night’s sleep. What better time than now to remind investors why fixed income should always be a core component to the overall investment strategy:
- Individual bonds have a defined (known) income stream that will not deviate from the day of purchase to the day of maturity. It is one of the few investment vehicles where the holding period yield (return) can be calculated at purchase.
- Individual bonds have a specific day (maturity) when an investor’s entire face value will be returned to them… regardless of interest rate fluctuations, supply/demand issues, politics, policy changes or any other outside variables moving the markets during the holding period.
- Cash flows will remain constant and known throughout the holding period.
- Cash flows can be controlled by the investor to meet their individual needs. Through coupon selection, investors can increase cash flows to meet specific liquidity needs (this can create higher current yield).
- Bonds may not make you wealthy, but they can keep you wealthy. Having a known maturity, known cash flow and known income provide the core framework to offset higher potential total return but higher risk assets where volatility can create extreme appraised values. In a year when stock values have created wealth, bonds can preserve it.
- Investment grade bonds have a very high credit quality and therefore very low historical default rate.
- Bonds can be selected to meet very specific investor needs, thus they offer a tailored asset allocation to blend with other asset allocations.
- Individual bonds do not rely on being able to accurately predict future market moves in order to provide their benefits when held to maturity.
- There is complete transparency (you know exactly what you own and how it will perform) when you hold individual bonds.
- Regardless of market interest rate levels or changing market variables, benefits 1-9 are in play.
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. Prior to making an investment decision, please consult with your financial advisor about your individual situation.