Bonds and Fixed Income
Bonds and other fixed income instruments serve a number of objectives, but their main goals are principal preservation and income generation. While they should play an important role in your portfolio, their role may vary according to your financial needs and concerns.
With a little effort you can build income portfolio using high quality bonds and CDs that will provide you with a consistent cash flow tailored to meet your retirement needs. But before doing so, understand that interest rates, inflation, taxes, defaults, government debt, and other factors all play a part in designing an effective bond portfolio.
When building a bond portfolio you should consider:
Lowering Your Risk
Historical evidence shows that investment grade bonds with Aaa/AAA ratings are very safe investments. Many risks can be minimized by diversifying a bond portfolio using different types of bonds to avoid regional concentration. Interest rate risk can be minimized by lowering bond duration and building ladders of different maturities.
Laddering Your Bonds
Buy-and-hold investors can manage interest rate risk by creating a “laddered” portfolio of bonds with different maturities. When one bond matures, you have the opportunity to reinvest the proceeds at the longer-term end of the ladder. If rates are rising, the maturing principal can be invested at a higher rate. If rates are falling, your portfolio is still earning higher interest on the longer-term holdings.
Lowering Your Taxes
Interest from U.S. Treasury bonds is not subject to state or local income tax. Many municipal bonds are triple tax-free; that is, for investors who live in the same state as the issuer, the interest received from the bond may be exempt from federal, state and/or local income tax. The choice between taxable and tax-exempt bond income depends on one’s income tax bracket as well as on the difference between what can be earned from taxable versus tax-exempt bonds.
Purchasing Individual Bonds Instead of Bond Funds
If you buy actual bonds and hold them to maturity, you know exactly what you’re getting and don’t have to worry about losing money. You’ll be getting regular interest payments, and you don’t have to pay the higher expense ratios that you do with bond mutual funds.
Lowering Your Costs
Investors typically do not realize that investment-related costs determine a large part of a portfolio’s yield and return. This applies especially to fixed income securities. Bond mutual funds often come with high annual expense ratios needed to pay for advertising and salaries. By purchasing individual bonds products and holding them to maturity, you pay only when you purchase the bond.
Letting us help
Your objectives may involve a different portfolio approach, or a combination of strategies to minimize your risk and meet your retirement objectives. if this all seems to complex, let us help you. Building the right income portfolio will give you the freedom to pursue your interests and dreams instead of losing sleep over fluctuations in the stock market.