Know what you own

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

“Know what you own” is one of the many phrases we use to help describe and define fixed income, the components of bonds, and the characteristics that affect an investor. They emphasize the benefits of owning a portfolio of individual bonds compared to other fixed income options. It may appear simplistic, but it reminds me of my past grade school teacher’s quote, “All blue jays are birds, but all birds are not blue jays.” You’re probably not as dazzled as I was, but it can serve as a good reminder that a strategically designed investment portfolio, with the right components, can help reach an intended goal while accommodating an investor’s risk profile.

All individual bonds are fixed income products, but all fixed income products are not individual bonds. Understanding this concept will help shape your investment portfolio’s fixed income allocation to achieve your ultimate goal better. First, however, let’s reveal the various investment goals that may influence product selection.

For many of you, the primary purpose of fixed income is often to protect the wealth that has been accumulated to this point. This concept subsists whether interest rates are at 1% or 10%. This primary purpose can easily be overlooked when interest rates are elevated, such as they are today. Capturing income with fixed income can often be the secondary goal, so when there is a favorable income-producing rate environment, it is easy to forget about protecting wealth and concentrate solely on growing wealth. The problem is that economic environments change, creating very different outcomes for certain product selections.

If there is one bond characteristic that defines its ability to preserve wealth, it has a stated maturity date and value. A stated maturity makes interim price changes that can occur during a bond-holding period mere background noise, providing a known service over a known period for known results. When you purchase an individual bond and hold it until maturity, the interest earned is known, the cash flow stream is defined, and the date when the bond’s face value is returned is stated. Only two events can prevent this from happening. One is a bond default. When purchasing high-quality, investment-grade bonds, this is a highly unlikely event. The other event that can prevent this is to sell an individual bond before maturity. In this case, an investor is subject to whatever market conditions exist at the time of sale. This could be a positive or a negative, depending on the market. By holding an individual bond to maturity, an investor knows that it will perform as intended every single day that it is held in the portfolio, regardless of any outside influences or interim price changes.

Know what you own. Different products provide different benefits and often accomplish this through varying degrees of risk. Funds with bonds do not benefit from stated maturities, thus subjecting an investor to price changes and principal deviations. Individual bonds possess a unique feature for wealth preservation that transcends them into a category by themselves. One of the purest ways to preserve one’s wealth remains in the product that is uniquely equipped with a stated maturity – individual bonds.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.