Five Expert Tips on Building Your Fixed-Income Portfolio
Even if you’re just getting started on your investing journey, you probably know that financial advisors recommend you have a diverse portfolio. This means you have funds allocated to stocks, fixed income like annuities and bonds, and maybe even cryptocurrency. When you invest in several asset classes, you can keep your portfolio income high, reduce risk, and stay ahead of inflation.
But there is such a thing as playing it too safe with your investments. Many new investors get trapped in low-yield portfolios, which may show a small return year over year but leave one wondering if there are higher yields out there. This is where DCF Income Payments come in.
According to Nathaniel Pulsifer, Co-Founder of DCF Exchange, while investors usually think about fixed-income assets for retirement income, they can also be part of a safe accumulation strategy. Fixed income is applicable for the conservative portion of any portfolio, even for the millennial investor just starting out. Here are five expert tips to help you build your fixed-income portfolio.
The mix of fixed-income assets you hold is key.
“There was a time when retirees could generate enough income to cover their living expenses from long-term bond holdings, but those days are gone thanks to historically low interest rates,” said Pulsifer. In a changing market, it’s important to explore alternative fixed income assets in your portfolio.
Fixed income assets play three key roles:
- They offer less volatility and more stability when compared to stocks.
- They act as a safety net, protecting money you may need to tap into soon.
- They do generate income, despite low rates of return.
The challenge is that no single bond or fixed income asset can play all of these roles well. For this reason, your mix of assets is key.
“What’s important here is understanding what your portfolio needs and what types of fixed income best support those needs,” said Pulsifer. “This is your first step.”
Set your priorities.
Recognize that your priorities will likely shift with the market. When interest rates were higher, the primary objective of fixed-income portfolios was generating income and protecting it from inflation. Today, investors look for assets that offer more flexibility.
Younger investors can afford to keep a higher portion of their portfolio in stocks, while also investing in high-quality fixed income assets to stabilize their portfolio, Pulsifer added. On the other hand, older investors may want a higher percentage of assets in fixed income, and should choose fixed-income assets that can generate measurable income, such as an amortizing payment stream that returns principal and interest.
Build a laddered portfolio.
One strategy that can help you see higher returns on your investments without taking on a lot of additional risk is to build a laddered portfolio. Here’s how it works in a nutshell: You buy several individual fixed-income securities with different maturity dates.
“Keeping a variety of different fixed-income assets with varying maturity dates allows you to get higher rates of return than if you were simply keeping your money in a savings account,” Pulsifer said. “But it also keeps your money flexible so you can take advantage of the rising interest rates we’re almost certain to see in the next few years.”
Instead of locking all of your money with one investment at today’s rate, with a laddered portfolio you can set things up so that you are able to regularly reinvest a portion of your money at a higher rate.
Don’t ignore the risks.
It’s true that fixed-income portfolios are a very safe investment option. However, if you assume that you’ll always make a profit, you may be in for a rude awakening. Interest rates can be volatile, warns Pulsifer, and if you are forced to sell a fixed income asset in a rising rate environment, you might risk your principal.
Bonds have a high interest rate sensitivity, and even small moves in rate can decimate the value of your long term holdings. Mitigate this risk with amortizing payment streams and plan to hold to maturity.
“The good news is that the right financial advisor can help you build a fixed-income portfolio that can hedge against these and other risks,” Pulsifer added.
Don’t overlook the fees.
Finally, it’s important to pay attention to the fees and commissions when researching your fixed-income options. High fees could eat into a chunk of your returns and even possibly wipe out projected income.
If you shop around and do your homework, though, it is possible to find cost-efficient fixed income assets. Pulsifer recommends searching for funds that don’t include hidden management fees or annual charges, and also recommends DCF Income Payments, which are higher yield amortizing fixed income payment streams from insurance companies. In the end, the less money you spend in fees to preserve your principal, the better.
These five expert tips will help you build a fixed-income portfolio with maximum benefits, ensuring you’re setting yourself and your money up for success. Invest wisely!
[Related: Solving the Savings Shortfall]
Jenny Johnson works for Brava Digital Marketing.
Nathaniel Pulsifer is the co-founder of DCF Exchange. He founded DCF Exchange in 2016 to help clients diversify their portfolios and achieve higher yields on fixed income with payments from top-tier insurance companies. To learn more, visit here.
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