Fixed income allocation is a diversification strategy that places part of a person's money in debt securities that guarantee the payment of interest as well as the eventual repayment of the principal. These may include corporate or government bonds, for example. These guarantees mean the investment is low-risk. The goals of fixed income allocation are to generate a steady income and preserve capital.
Investors have many options in which to invest their money. Typically, an investment portfolio is designed around the investor's lifestyle goals and objectives, or what the investor eventually hopes to do with the money tied up in the portfolio. Goals and objectives are a reflection of an investor's tolerance for risk, how likely it is he will need to sell off his investments in the short or long term and his current condition. A very young investor might not plan to retire for another fifty years and can afford to place his money in higher risk vehicles with the potential for a higher rate of return. He might not have any pressing need for his money and can afford to place it in investment vehicles with longer maturity dates.
An investor typically chooses a fixed income allocation of his assets if he is risk-adverse. Fixed income investment vehicles, like bonds and mortgage-backed securities, offer a guaranteed interest payment over the life of the loan with little potential to lose the original capital invested. Ordinary stock, conversely, can increase or decrease in value, depending upon business conditions and the condition of the economy. The total amount invested in common stocks is at risk, and a stockholder has no guarantee of ever receiving a dividend, or profit allocation.
Older people and people planning for retirement are the usual client profile for a fixed income allocation strategy. In times of economic downturns, other investors also shift assets towards fixed income investment vehicles to counterbalance the heightened risk of loss that other holdings in a portfolio might experience. The inclusion of fixed income securities evens out the portfolio's rate of return and prevents it from losing too much value.
A fixed income allocation strategy is considered to be counter-cyclical. The returns on these types of investments run counter to the market and the rate of return on other investments. Other types of investments, such as stocks or real property, are tied to the condition of the economy, so when the economy is bad, these investment lose value. Conversely, bonds and other fixed income assets retain their value, even in difficult economic times.