This month, in addition to our piece on Emerald Advisors’ portfolio methodology and stock investing, we are providing this primer on another key pillar of your overall wealth strategy and investment portfolio, fixed-income securities. Simply put, our fixed-income strategy is an investment approach that focuses on generating consistent and predictable returns through investments in bonds, treasury bills, certificates of deposit (CDs), and other debt instruments issued by governments, municipalities, and corporations.
For your investment portfolio, Emerald Advisors will blend in an appropriate amount of fixed-income securities and funds, consistent with your established goals and time horizon, achieving the following fixed-income strategy objectives:
- Income Generation: When we invest in fixed-income securities, such as bonds, you receive regular interest payments over a specified period. These interest payments can provide a reliable source of income, especially for those who are retired or seeking income stability.
- Capital Preservation: Fixed-income securities are generally considered less risky than stocks. They provide a fixed return on investment and have a predetermined maturity date when the principal amount is repaid. This characteristic makes them attractive to those of you prioritizing capital preservation.
- Diversification: Emerald Advisors builds investment portfolios with a mix of different asset classes. Fixed-income securities can serve as an important diversification tool, as they often have a low correlation with stocks. By including fixed-income investments in your portfolio, you can potentially reduce the overall risk and volatility of your investment holdings.
- Risk and Return: While fixed-income securities are generally considered less risky than stocks, it’s important to note that they still carry some level of risk. The risk associated with fixed-income investments primarily comes from credit risk (the issuer’s ability to repay the debt) and interest rate risk (fluctuations in interest rates affecting the market value of the bond). At Emerald Advisors, we will assess your risk tolerance and recommend a mix of fixed-income securities that align with your financial goals.
- Duration and Yield: We consider these important factors when evaluating fixed-income investments for you. Duration measures the sensitivity of a bond’s price to changes in interest rates. Longer-duration bonds are generally more sensitive to interest rate changes, which means their prices can fluctuate more. Yield, on the other hand, indicates the income generated by a bond relative to its price. We take care to understand the relationship between duration, yield, and investment objectives when constructing the fixed-income portion of your portfolio.
In addition to deciding on what type of fixed-income securities to include in your portfolio, Emerald Advisors employs the following fixed-income security investment strategies when appropriate to enhance returns on your portfolio:
- Laddered Bond Portfolio: Commonly referred to as “bond ladder investing,” this approach focuses on diversifying the portfolio by purchasing fixed-income securities with different maturity dates in a ladder-like fashion, i.e., low to high-rung-like fashion. This method helps mitigate risk by leveraging short-term bonds one at a time as and when they mature, then reinvesting the principal in higher-rung bonds. It ensures increasing returns and a profitable investment portfolio.
- Bullet Bond Portfolio Investing: The bullet bond portfolio investing strategy involves purchasing fixed-income securities at different dates but with the same maturity date. It diversifies the investment portfolio and, at the same time, ensures a future “bullet” of profitable returns. We use this for those of you who may need large amounts of funds at a predictable point in the future. It may be to fund a college education, pay for a wedding, purchase a large property, or other goals you may have.
- Barbell Bond Portfolio Investing: A fixed-income investing strategy where we build a portfolio with two extremes, i.e., short-term, and long-term bonds without intermediate bonds. We then pay close attention to the short-term bonds (say less than five years) of the portfolio and keep rolling them into new long-term bonds (say 10 years or more) as they mature. The key here is the active management we provide, keeping your high-performing “barbell” of short and long-term bonds well balanced.
In summary, Emerald Advisors will work closely with you to determine your investment goals, risk tolerance, and time horizon. We will then recommend a fixed-income strategy tailored to your needs, which may include a mix of bonds, government securities, or other fixed-income instruments. Regular portfolio reviews and adjustments will ensure that your fixed-income strategy remains aligned with your changing financial circumstances and objectives. As part of your overall wealth strategy, fixed-income securities add comfort, stability, and reliability, perhaps allowing you to breathe a bit easier in these challenging and unpredictable times.
As always, we are ready to discuss these strategies with you in more detail or answer any questions you may have.