Fixed income is an important part of any investor’s armoury.
Fixed income can serve several different purposes such as generating a consistent flow of income, providing defensive exposure and portfolio diversification.
Consistent flow of income
Generally, equities do not provide a steady cash flow to investors. Equities tend to pay dividends as earnings allow, and generally on a semi-annual or annual basis. For those seeking a more stable flow of income, fixed income allows investors to understand the cash flows that they can expect to receive at the time of investment. This can be useful for investors to plan expense requirements such as funding a pension.
The fixed income asset class is generally less volatile than equities given the expected cash flows are more predictable. This can be useful in protecting capital when investor sentiment is weak or bearish, and this can be used to invest in risky assets once the investor believes that the risky assets have fallen far enough to be considered cheap.
It has long been said that the only free lunch with regards to investment is diversification. Diversification is the basis of a modern theory which states that a well-diversified portfolio improves risk-adjusted returns. Fixed income assets generally have a low or negative correlation to equities, and the lower the correlation, the better the diversification benefits.
Therefore, regardless of what type of investor you are and what your objectives are, fixed income should always be a consideration for investment portfolios.