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 Investing In Fixed-Income Securities
We have already seen throughout this section, these fixed-income securities are usually less risky than stocks, or mutual funds, and for many investors, one of the primary financial goals may be not to lose, at any cost, the money they already have accumulated. For these investors, fixed-income securities may be the best types of investments, or may, at least, be a great part of a fully and properly divested portfolio.
As we have seen, many of the investments in this category are affected by the institution offering the securities. Sometimes these have excellent credit ratings, such as the United States government. Others, such as many corporation or municipalities may have lower credit ratings. Each investor should decide, before investing, what the parameters of these decisions are, since the temptation, at the time of purchase will be to opt to the higher interest rate paying bond, even if the issuer is less credit worthy. Usually, lower credit ratings cause the payment of slightly higher interest rates. It can also be a strategy to have both, United States government issued securities and some lower rated bonds. This can help to diversify your portfolio and to increase returns, if the right mix is properly conceived.
The duration (maturity) of their fixed-income securities is an important ingredient in the investment decision. Before purchasing, each investor should develop a plan of fixed-income securities based on duration. Having all securities mature at the same time can be fatal to certain expected returns. However, having varying periods of duration, can cause accounting and tax complications, and can also cause a temptation to abandon an original strategy of investment that may still have merit. Each investor should analyze the period of maturity, since the money will likely, in most cases, remain tied up, and may not always be easily accessible to the investor, in an emergency. There is much to be said for using the principles of diversity here also, and attempting to structure varying maturity dates to protect against market or interest rate fluctuations.
Calls of fixed-income securities in the past few years have skyrocketed, as interest rates have fallen dramatically. Many securities are callable, usually at the issuer's choice, and as such, when these issuers stand to lose substantial amounts of money (of course, investors, at the same time, stand to make higher returns from these issuers) the securities may be redeemed and securities with lower interest rates may be offered. This may upset an investor's financial plan, and the upset may be significant. For example, in 1993, assume an investor had purchased 10 year bonds paying a 10% interest rate, and based much of their financial goals on what their portfolio would look like in 10 and 20 years, using a 10% rate of return. No diversification seemed necessary to this investor, since they were satisfied with safe 10% returns. When 1995 and 1996 rolled around with significant interest rate declines, many of these securities were called, and replaced with securities paying 6 or 7 percent. Such a loss in interest rate income previously provided for in a 10 or 20 year plan, after only a few years into the plan can cause huge "plan losses", and investors faced the problem of not meeting their goals. Many securities today have an insurance aspect to protect the investor, and some securities are no longer callable, or have serious limitations on the ability of the issuer to call these securities. Each investor should either invest in securities with one or more of these security options, or revise their financial plan with the idea that the scenario discussed above may cause problems for them in the future.
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