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How do I Choose the Best Fixed Income Strategies?

Jim B.
Jim B.

Investors choose fixed income strategies over other investment opportunities like stocks because fixed income investments offer them reliable income even when the overall market is struggling. This is because bonds, which are the most common types of fixed investment securities, return regular interest payments to investors as well as the eventual repayment of the principal paid for the bonds. It is important for investors to know that even bonds have risk attached because of the possibility that the institutions issuing the bonds might default on their payment obligations. For that reason, investors should choose fixed income strategies that reflect their individual wishes in terms of intended growth and acceptable risk.

As the stock market is often volatile and prone to quick changes of direction, investors with their money in stocks must be willing to accept the risk that their capital may not be returned to them. That is why many investors settle for fixed income instruments like bonds, which are essentially loans paid out by institutions to investors, who benefit from regular interest payments. Even these seemingly safe investments have some amount of risk attached, so investors should choose fixed income strategies with these risks in mind.

Businessman with a briefcase
Businessman with a briefcase

Many fixed income strategies are based on the bond yield statistics, which are measurements of how much specific bonds are expected to pay back investors. These bond yields are based on interest rates offered by the bond issuers, but it's important to realize that higher interest rates are usually given to offset the risk of those institutions defaulting. As a result, bonds with lower interest payments, while not as profitable, also are far less risky.

With this knowledge in mind, investors should tailor their fixed income strategies based on their willingness to incur risk. If an investor wishes to take a chance because he's looking for big returns, he should be focused on corporate bonds issued by companies with shaky credit ratings. These institutions will offer the best interest rates. Investors looking for more stabililty should invest in government bonds, which offer small interest returns but also remove most of the investment risk from the equation.

One of the more popular fixed income strategies that an investor should consider is diversification of his bond portfolio. This entails balancing out his fixed income investments between those that offer high potential returns and those that are on the safer side. By doing this, an investor can still have a chance for solid capital growth but will also lessen her overall risk.

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