Strategies for Fixed Income Investments
Despite low interest rates, sometimes there is no alternative to fixed-income investments
If preservation of capital due to a relatively short investment horizon or a conservative investment approach is your top priority there is almost no alternative to traditional fixed-income investments, despite current low capital market interest rates. We do not ascribe to the trend to allocate funds to hedge funds and total return products.
Bond funds: a cost trap?
Few advisors offer their customers direct fixed income investments through bond purchases. Instead fixed income funds are recommended. The purchase is usually associated with an initial sales charge of 2% or more. The annual management fees of bond funds can be as high as 2%.
Through fund-based asset management, or in a fund of funds, the cost of your fixed income investments can rise to 3 % or more – year for year. The yield on 10-year US Treasuries is a mere 1.8 %: It is difficult to achieve any significant positive returns with such a setup. “Conservative” asset management can result in an 80% or more allocation to bond funds.
80% of the total investment is unlikely to generate any positive return.
The solution: build financial ladders with bonds!
Our advice is to set up bond portfolios with staggered maturities, so that each year a bond will mature. Proceeds can be withdrawn or added to existing ladder rungs. A mix of different maturities, currencies and credit ratings will produce a relatively high average yield and a current stream of income and cash proceeds from maturing bonds.
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