BY KRISTIN HOVENCAMP
Lately, a typical day on Wall Street fluctuates from flat to “the sky is falling.” The secret is to block out the noise and focus on your financial goals. As a long-term investor seeking wealth preservation and steady returns, you most likely avoided bonds and sought bond-like substitutes. However, now may be the time to reconsider adding fixed income exposure to your investment portfolio.
Why bonds? Investors allocate to fixed income for various reasons. Generally, a bond’s primary role in a portfolio is principal protection, and its secondary objective is providing cash flow and revenue.
What is a bond? A bond is an instrument of indebtedness. Companies and governments issue bonds to raise capital by borrowing from investors. When investors purchase a bond, they buy the bond issuer’s debt. The bond issuer is committed to paying the bondholder the principal amount and the pre-established interest when the bond reaches maturity.
Can allocating to bonds yield enough income to garner much attention? Through 2021, bond yields remained so low an investor could not turn to bonds for high income. For example, one year ago, the benchmark U.S. 10 Year Treasury note yielded approximately 1.5%. Today, the 10 Year Treasury is hovering around 4.0%. Rising interest rates help to strengthen bond yields.
Bonds are not risk-free. Before purchasing a bond, be aware of the bond’s maturity date, credit quality, liquidity, and tax-exempt status. Investors with taxable portfolios would be wise to investigate yields on municipal bonds exempt from federal income tax. Bonds also come with interest rate risk, as they are sensitive to changes in interest rates.
Bonds continue to be an anchor in a long-term investor’s portfolio due to their ability to yield income and help reduce risk. As an asset class, fixed income diversifies a portfolio and offsets investments in other assets. Finally, now may be the appropriate time to allocate to bonds.
Kristin Hovencamp is an Investment Executive and Director of Business Development with HAZLETT WEALTH MANAGEMENT, LLC, which is independent of Raymond James and is not a registered broker/dealer. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. 675 Sun Valley Road, Suite J1 + J2 Ketchum, Idaho 83340 208.726.0605.