Why Investors Should Consider This Under-the-Radar Asset Class, According to a Finance Expert
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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Wondering how to get more out of your investments but feel like you’ve already tried everything? You’re not alone. With the markets constantly shifting and buzzworthy investments getting the loudest hype, it’s easy to overlook less dramatic but reliable investments. One investment type that might have flown under your radar is known as “fixed income.”
“My favorite asset class is ‘fixed income,'” said Jan van Eck, CEO of Van Eck Associates Corporation, at a University of Virginia investing conference. According to him, fixed income investments like bonds are a compelling investment option — especially with higher interest rates and a volatile stock market.
Find out why you should consider investing in this asset class.
What Is Fixed Income and How Does It Work?
So what does “fixed income” actually mean? It’s just an umbrella term for investments that pay a, yes, fixed amount of income on a regular basis, usually in the form of interest. Think of U.S. Treasury bonds, municipal bonds, corporate bonds, certificates of deposit (CDs) or even bond-focused exchange-traded funds (ETFs).
While these investments don’t deliver huge growth, they do bring predictable returns and lower risk. That makes them especially attractive for retirees, cautious investors or anyone looking to balance out a more aggressive portfolio.
Why Consider Fixed Income Investments Now?
With interest rates still decently high and not likely to come down in the near term, fixed income investments can deliver real returns. For a while now, bonds and CDs have been paying out yields that can keep up with inflation.
Van Eck explained that the power of compounding returns is one of the major reasons investors should revisit this asset class.
“People have forgotten the beauty of getting up to 8% on a fixed income return… If you reinvest those dividends, compounding at a high rate makes up for some of the problems you have with fixed income,” Van Eck said.
For example, a $10,000 investment in a 5% bond that compounds annually for five years grows to more than $12,700. That’s a level of dependable, low-risk growth without any of the worries of market losses.
Lessons From the 1970s: Bonds Outperformed Stocks
Van Eck pointed to a fact he found surprising in looking at historical data: During the inflation-heavy 1970s — an era when commodities and gold were high performers — bonds actually outperformed stocks, once those outliers were stripped away.
“I’m not saying we’re going to the Seventies per se,” he said, “but I think people have forgotten the beauty of getting 8% on a fixed income return.”
Today’s interest rate environment may not be the same as the 1970s, but steady income and compounding forces are a great combo for any investor.
Who Should Consider Fixed Income Now?
Fixed income investments can act like an anchor in nearly any portfolio, but they may be especially valuable for:
- Retirees looking for steady income
- Risk-averse investors who are being careful with their capital
- Anyone building a diversified portfolio
You don’t need to buy individual bonds to benefit, either. Investors can explore options like bond ETFs, high-yield savings accounts, I-bonds and CDs. For those hesitant about tying up their money for the long term, short- or intermediate-term bond funds may offer more flexibility with less interest rate risk.
A Good Option in a Diverse Portfolio
Fixed income may not be trendy, but anyone looking to build a diverse portfolio should consider this asset. With higher yields, strong compounding opportunities, and proven performance in past high-inflation eras, sometimes a “boring” investment is the smartest one.
Smart investing is one part trying to predict the future, and another part looking to investing lessons of the past.
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