What are Fixed-Income Investments and should you add them to your portfolio?

What are fixed-income investments, and do they have a role in in a diversified portfolio? Not as much, in our view, as high-quality blue chip stocks like the ones we recommend

What are fixed-income investments? For the most part, fixed-income investments are designed to provide investors with a fixed stream of current interest income. Fixed income instruments can include T-bills, GICs, bonds plus bond ETFs or bond mutual funds.

At TSI Network we feel that fixed-income investments should only make up a very small part of your portfolio, if any, and that you should instead mainly focus on high-quality blue chip stocks.

Bonds are unlikely to perform as well in the next few years as they have in the past, mainly because interest rates will likely hold steady or rise. (Bond prices and interest rates are inversely linked. When interest rates go up, bond prices go down, and vice versa.) That means bonds funds would only earn interest income; instead of capital gains, they could conceivably, in fact, produce capital losses.


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What are fixed-income investments: Can they have any role in a portfolio?

Though fixed-income investments don’t offer the same growth prospects as equities, they can act as an offset to the volatility of a stock portfolio. They can help stabilize you portfolio’s value. They serve as reserves you can use to buy more stocks when prices are down. For that matter, when stock prices are down, you can use your reserves for personal spending to avoid having to sell at a low.

The right equities/fixed return split varies widely from one investor to another, of course. It depends on your financial circumstances and your temperament. If you’re a young investor with a secure income, and you add regularly to your stock holdings, you may want to keep all your long-term savings in stocks. If you are retired or close to it, you may want hold some fixed-income investments—but stick with Canadian T-bills with maturities of around three months, or perhaps, short-term GICs. Regardless of age, all investors should stay out of long-term bonds.

What are fixed-income investments? 3 examples you need to know

T-Bills: Canadian treasury bills or T-Bills are short-term Canadian government bonds with a maturity of one year or less. They are fully backed by the Canadian government and are considered one of safest investments you can make.

T-Bills avoid virtually all risk-but they also avoid most profit. T-Bills should only be used by investors who seek a short-term home for their investments. That may include requiring your funds for a house purchase in the near term, and so on. T-Bills can also be used as a short-term investment safety net.

Index-linked GICs: Index-linked GICs, or index-linked guaranteed income certificates (GICs),  are marketed as secure and profitable place to put your money by providing buyers with a return that is “linked” to the direction of the stock market in a given period—but they’re usually a more secure source of income for the seller than the buyer.

If you decide to invest in an index-linked GIC, you could be making one of the costliest mistakes that investors can make: That is to accept the advice of a securities or insurance salesperson without considering how conflicts of interest may have influenced that advice.

The payout may depend on the average level of the index over the course of a year, rather than the year-end value. This will tend to diminish the performance that determines investor returns. In the end, index linked GICs were created to give investors a false sense of security.

Bonds and bond ETFs or mutual funds: In simple terms, a bond is a form of lending whereby you lend money to a corporation or government. In return, a bond pays a fixed rate of interest during its life. Eventually, a bond matures, and holders get the bond’s face value—but nothing more. Receiving the fixed interest and face value at maturity is the best that can happen.

Furthermore, bonds also generate more commission fees and income for your broker, compared to stocks, especially if you buy them via bond mutual funds or ETFs and other investment products.

Put more focus on blue chip stocks than fixed-income investments

To succeed in the long term, we think you should find the best blue chip stocks to buy, and then hold on to them.

Most of these stocks will have an established business and a history of sales gains, plus some earnings, if not dividends. To put it more simply: these stocks have a clear business plan that seems to be working.

We feel most investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. Some of these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Others could have above-average growth prospects, compared to alternative investments.

For long-term investment goals that can pay off, use our TSI Network three-part Successful Investor philosophy for investing:

  • Invest mainly in well-established, dividend-paying blue chip companies;
  • Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
  • Downplay or avoid stocks in the broker/media limelight.

What percentage of your portfolio do you dedicate to fixed-income investments, and which type do you prefer?

Do you agree that blue chip stocks are generally a better investment than fixed-income investments? Or do you feel like fixed-income investments can bring benefits to a portfolio?

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