Benefits Of Using Fixed Income Products In An Investment Portfolio

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Aug 26

good investment advice from famous people

Warren Buffet, the billionaire investor recently advised the multi-millionaire basketball star Lebron James to keep it simple when James asked him for investing advice.

For people who don’t understand investing at all, “Just making monthly investments in a low-cost index fund makes a lot of sense,” Buffett said.

He added: “Owning a piece of America, a diversified piece, bought over time, held for 30 or 40 years, it’s bound to do well. The income will go up over the years, and there’s really nothing to worry about.”

Fixed Income Products

practical application for the rest of us

But most people are not young millionaire basketball players like Lebron James. People in different stages of life have varying financial needs. They also have different attitudes towards risk. This simply means, the capacity to absorb fluctuations in their investment, varies from person to person.

Some people just don’t like high risk or fluctuations in their investments, and want a component of certainty. They want an element of fixed or stable returns in their portfolio regardless of market conditions, and fluctuations. Low-cost index funds or ETFs as recommended by Warren Buffett cannot provide these type of returns as they are completely linked to market performance.

This is where ‘Fixed Income products such as bonds and structured products’ play an important role in an investment portfolio. They provide fixed or stable returns, regardless of market risk.

You see, no financial advisor on the planet can predict or control investment returns, at least not consistently over time.

The most important role of a financial advisor who represents you is to ‘Control Risk’, i.e. reduce the drastic fluctuations in your investment portfolio, thereby protecting your hard-earned money.

types of investments

There are essentially only two types of investments:

  1. Traditional Investments– Investments that pay you when the market value goes up, and
  2. Securities– Investments that pay you when the market value remains flat or goes down.

1. securities

The main types of securities are:

  • Cash in the bank.
  • Fixed Deposits
  • Government and Corporate Bonds
  • Structured Notes
characteristics of securities
  • Securities are mostly capital and / or returns guaranteed investments
  • If the issuer of the security goes bankrupt, you can lose some or all of your money.
  • The issuer of the security can do whatever they like with your money without informing you of the same.
  • Money is not invested in the asset directly.

2. traditional investments

The main types of traditional investments are:

  • Stocks
  • Index Funds / ETFs / Mutual Funds
  • Commodities such as Gold, Silver, etc…
  • Real Estate
characteristics of traditional investments
  • Traditional investments are generally neither capital, nor returns guaranteed.
  • Value of the investment fluctuates based on various market-linked factors.
  • Money is invested in the asset directly.

summary

so, is warren Buffett wrong?

Of course not, what I am trying to say is ‘a balanced portfolio’ is right approach.

Every investment portfolio should have it’s share of ‘Traditional Investments’, and ‘Securities’. The percentages of both in any given portfolio will vary quite a lot depending on the following factors:

  1. Age of the investor
  2. Understanding of investment products.
  3. Attitude towards risk in the investment portfolio, and
  4. Time frame – when the investor needs the money back.

have questions?

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