A constant financial standard is that risk equals rate. In business, higher risk can equate to higher borrowing costs. When large corporations price the bond returns, they have to pay higher returns based on credit ratings from the rating agencies. And when investors choose investments, they should expect the chance for higher returns on riskier investments.
But risk is still risk. Higher returns also have a higher chance of substantial losses. Additionally, downside potential can be far more significant than upside potential when a market becomes very volatile and possibly enters the bear-market territory. It’s a great time to consider fixed income investments, especially for individuals getting closer to retirement age without the benefit of an extended timeline for a market rebound.
If your portfolio isn’t very diversified, there is no better time to invest in fixed income.
The benefits of fixed income are both strategic and substantial. Even in periods of high inflation, that might be outpacing their returns for a while. Here are the most significant benefits of fixed income:
Safety
Minimizing market risk during a time when you could lose investment value of 20% or more is equivalent to making money when your money is in a fixed-income asset. Savings can be just as good as increasing earnings, and knowing your hard-earned money is in a safe place carries a substantial premium.
Value Growth
The value of a consistent fixed income asset will tend to run counter to a volatile or lousy market, actually increasing in value as other investors move to value wealth protection over growing wealth.
Bonds are a great example. Even though their yields fall as investors buy more in a move to safety, their value increases. Real estate will most likely continue to grow its investment value while providing a monthly income, a great scenario in difficult times. It can sell at a premium if that real estate has solid, long-term tenants.
Income
Getting a monthly or quarterly check is far preferable to watching the value of your investments sinking during your daily (or hourly) market check-in. For many investors, growing that monthly income stream can become the basis for an excellent retirement, even at much earlier retirement age.
Few things are better than rent checks coming in every month.
Tax Deductions
Many fixed-income investments involve substantial tax deductions, especially when structured adequately into the correct business form, leaving little to no tax liability. Imagine your rental LLC, taxed as an S-corp, paying many of your relevant personal expenses and the interest for your property loans. Next, add the 20% pass-through income deduction on your earnings over your personal paycheck.
Municipal bonds may have a lower return but have zero tax liability. Pretty neat, right.
Regardless, it’s always better to pay some taxes on earnings than write off losses, uncertain when those write-offs might be used. Make money now, not later.
These are just four excellent benefits of fixed income, the biggest being the greater comfort of knowing your assets are safe. Removing that fear of risk is invaluable at times of high volatility.
