There are no guarantees in life, but getting close to one has its benefits. There is some angst in the marketplace, and the headline noise tells us that fear of the effects of tariffs is on the top of the list. No one enjoys seeing their portfolio decline in value, regardless of the reason. Fixed income can be the stable part of your investment portfolio. This does not discount the need to take on higher risk alternatives that allow the portfolio the potential for greater growth but promotes a way to increase the likelihood of preserving the wealth that has been accumulated. Each component of the investment portfolio serves its purpose. The primary goal of many investors with fixed income is wealth preservation.
For illustrative purposes only; Raymond James
This bond was purchased at a price of $100 (par) with a coupon of 2.25%. During its life, it paid the investor $2,250 in interest every year. The stated maturity is the day when the face value of this bond is to be returned – December 31, 2024. This also stayed the same every year the investor held this bond. Year after year, the bond paid the same interest, and the date the investor was scheduled to get their money back stayed constant.
Life was still happening over the holding period. There were geopolitical conditions changing, markets moving in various directions, consumer confidence swaying, political changes, impactful weather events, tax changes, wages fluctuating, and numerous other trials and incidents occurring. Yet, this bond continued to pay $2,250 every year, and the date on which the investor was anticipating getting their money back stayed the same.
Now, admittedly, the market price (second to last column) was fluctuating during the holding period, creating different unrealized gains or losses (last column). However, if an investor holds a bond to maturity, those statement risk items ultimately wash out because, at maturity, the bond price gravitates back to par ($100), and the investor receives their face value. Only two things can change this. A default on the debt is one but highly unlikely when holding high-quality, investment-grade credits. The other is selling the bond prior to maturity, which could be good or bad for the investor as it opens them up to the market price at the time of liquidation.
There is a lot of power in knowing what you own and that an individual bond will perform strictly as intended from day one through maturity. Creating calm and a sense of assurance helps and, most importantly, increases the likelihood that it preserves your wealth. Today’s market environment is providing other important benefits, such as increased income due to elevated interest rates. Although there are other welcome benefits, there are not many alternatives to the power of knowing.
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.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
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