What Is Fixed Income Investing?

Definition & Examples of Fixed Income Investing

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Fixed income investing is an investing strategy that focuses on very low-risk investments that pay out consistent income. Depending on your age and financial goals, the fixed income investment strategy may be ideal for you.

Learn more about fixed income investing, its pros and cons, and if it's the right investment strategy for you and your portfolio.

What Is Fixed Income Investing?

Fixed income investing focuses on investments that pay a return—whether through dividends or coupon payments—on a fixed schedule. Investors looking to adopt this strategy generally focus on low-risk investments, such as bondsbond mutual funds, money market funds, certificates of deposit (CDs), and blue-chip stocks.

How Fixed Income Investing Works

Fixed income investing involves specific goals that make assets like bonds, money markets, and CDs ideal. First and foremost, these investments are among the safest, which is important because most people with a fixed income investment strategy are concerned with capital preservation.

They also have reliable payouts on a fixed schedule that you can count on serving as an additional income source. You know exactly how much you'll be receiving and when you'll be receiving it. This allows investors to avoid dealing with the market's volatility and the uncertainties that come with it.

It's still important to have diversification among your fixed income investments.

Retirement is the most common reason for using a fixed income investment strategy because this is a time in life where achieving stable and predictable returns is most important. A retiree might rely on income sources, such as Social Security, pensions, annuities, or investment accounts, that produce the same amount of income on a year-to-year basis or increase at a low, nominal rate annually.

Pros and Cons of Fixed Income Investing

Fixed income investing is a good strategy for those with a focus on capital preservation, but it may not be right for everyone.

  • Capital preservation

  • Income generation

  • Low-risk

  • Risk of inflation

  • Interest rates may rise

  • Risk of default

Pros Explained

  • Capital preservation: Capital preservation is about ensuring the money you invest, at the very least, doesn't lose any value. With most investments with a clearly stated return amount and schedule, you don't have to worry about losing your principal investment. The principal amount may be inaccessible during the term of the investment, but it won't lose any value.
  • Income generation: Fixed income investing provides a reliable additional source of income. With interest rates higher than the majority of standard savings accounts, this is a great way to get more value for your money and let it work for you.
  • Low-risk: Fixed income investing allows people to invest without stressing over the volatility of the stock market and the risk it carries. Many factors outside of an investor's control affect how a stock performs, but the arranged schedule of fixed income investments make the majority of investments immune to this.

Cons Explained

  • Risk of inflation: An investor should assume an average rate of inflation—which has historically been 3.24%—when planning for any long-term investment objective. Since fixed income investments typically have lower returns, investors can find it difficult to get yields that outpace inflation without taking some risk.
  • Interest rates may rise: Bond prices move in the opposite direction of interest rates because of the effect the new rates have on old bonds. When interest rates are rising, new bond yields are higher and more attractive to investors, while old bonds with lower yields are less attractive, thereby forcing prices lower.
  • Risk of default: Although fixed income investments are generally some of the safest offered, no investment is 100% risk-free. Bonds, especially those from corporations, are always at risk of default if the company faces financial turmoil and can't repay its debts.

Key Takeaways

  • Fixed income investing involves investing in very low-risk assets that regularly pay out interest.
  • Retirees are the most common adopters of the fixed income investment strategy.
  • One of the biggest downsides to fixed income investing is that the returns may not outpace inflation.
  • Fixed income investing is a good strategy for those concerned with capital preservation.