There is a broad range of fixed interest investments. Bonds are probably the best known and most commonly used. As a classic example of a fixed interest product, when investors purchase bonds, they are lending money to the borrower (the issuer) on the condition that periodic interest payments on the loan are paid and the borrowed amount is repaid at maturity.
In a technical sense, a bond, no matter who it is offered by, is backed by specific collateral such as fixed assets or real property.
With fixed interest, wittingly or unwittingly, the investor is essentially gambling on the thought that more favorable interest rates will not be available in the short term.
It is common for investors to be most attracted to fixed interest investments in a climate where rates are reasonably high but where there are strong expectations of a weakening outlook. In such an environment investors can grasp an opportunity to lock in favorable rates for the longer term while rates decline.
Of course, sensible as this may seem, it is something of a gamble and it is certainly a matter of judgment where the sound advice of a Financial Adviser can only help.
The old question of balance between risk and financial gain is an issue with fixed interest investments just as it is with all other investments. Fixed interest investments provide excellent security when they are issued by government and semi-government bodies but not necessarily the best return. Obviously, every investment portfolio has unique elements that are personally tailored to the individual. The blend of investments held should be directly influenced by a range of variables that would always include at least:
- personal investment objectives,
- age of the investor
- income producing potential
- levels of risk tolerance,
- length of time to retirement, and
- individual and family financial circumstances.
A tried and proven technique in a diversified portfolio is to anchor a portion of total investments in an investment considered to have very little risk while offering solid and consistent returns.
Yet, such a policy begs the question, "how much of total investments should be directed to a fixed interest vehicle." There is no simple answer. While building up a portfolio through younger years, an individual focused on growth may have very little in fixed interest. The same individual, close to retirement, or actually in retirement, may have a substantial percentage of total investments in fixed interest products.
For an investor trying to decide on the level of fixed interest products for his/her portfolio, there are a few logical steps that can ultimately provide a great deal of confidence.
- Decide on a long term investment objective
- Clearly set the time frame for reaching your objective based on your needs as an investor
- Agree on how your objective is going to be met taking into account all types of investments that are available
- Select a carefully weighted fixed interest basket of products that provides security as well as the best chance of achieving your longer-term objective.
Overall, fixed income investments can nearly always be one of the elements that go to make up a balanced investment portfolio. Even without being a professional investor or without being particularly street-smart and experienced, most investors can recognize that appropriate exposure to a diversified mix of equity holdings and fixed income investments will always minimize investment risk and provide an added degree of long-term investment security. |
