Invest With Advice / Fixed Income Investments
Fixed Income Investments
THE GOOD
Fixed income securities are generally considered a secure investment that will generate interest income, and, if held to maturity, a guaranteed return. Fixed income investments are an integral part of every well-balanced portfolio. They provide safety of principal, regular interest income, and the potential to generate capital gains whenever interest rates move lower. They help to reduce the overall risk of your investment portfolio by providing a guaranteed fixed return when held to maturity and are a source of stable cash flow. If you are an active investor who currently owns stocks or equity mutual funds, fixed income investments can add stability to the value of your portfolio because of the potential return they provide.
THE BAD
Interest income is fully taxable when earned outside of a registered account. When comparing your returns from fixed income, always use your post tax return. Most bonds trade in what is called the over the counter market (OTC). Unlike the equity markets where you can see the price of what you are buying, investors can get a different price for the same bond depending on the size of the order and how much the trader or advisor builds in as a fee. In addition fees are often not disclosed. GIC’s also have built in fees. These fees are often much higher than what you would be charged if you buy a short term government bond.
The Alternatives
When considering fixed income it might be a good idea to look at some alternatives that share the same characteristics as fixed income but might be more efficient. Preferred shares are a good example but there are many more that can be used in place of the traditional fixed income investments. We will touch on the alternatives in the various bulletins.
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