As the name implies, fixed income investments provide the investor with a steady stream of income. This is the portion of a portfolio that can be counted on for dependable income and relatively less price volatility than stocks.

Income from our investments becomes more important when we enter retirement and no longer have income from wages. In contrast, while we are still working, growth of our investments is of primary importance. As we move toward retirement, the fixed income portion of our portfolio should become greater as the equity portion of the portfolio decreases.

In a properly balanced portfolio - using an asset allocation based on risk tolerance and years until retirement - the fixed income and equity portions of the portfolio will provide an appropriate balance of income and growth.

Investors with less than $500,000 and little time or interest to research various fixed income securities and their issuing organizations, should utilize mutual funds or ETFs for their fixed income investments. The funds will provide the needed portfolio diversification and protection should one or a few bonds default. However, investors wanting to place a portion of their fixed income assets in U.S. Treasury securities can purchase I-Bond savings bonds, Treasury Bills, Notes, and Bonds directly from the U.S. Treasury (see www.TreasuryDirect.gov).

Examples of fixed income investments -

• Bonds - corporate and government.
• U. S. Treasury Bills and Notes.
• Municipal bonds.
• Treasury Inflation Protected Securities (TIPS) and I-Bond savings bonds.
• High-yield Bonds (Junk bonds).
• Mortgage-backed securities.
• Convertible bonds (usually convertible into common stock).

Behaviors of fixed income investments -

• When interest rates rise, the value of fixed income investments decline.
• When interest rates fall, the value of fixed income investments will rise.
• Fixed rate - does not fluctuate with changes in interest rates in the economy.
• Some bonds may be callable - the issuer can redeem the security before maturity. This is more likely to happen in a declining interest rate environment.
• When interest rates change, price volatility is greater for long-term bonds than short-term bonds.

Some of the risks associated with fixed income investments –

• Inflationary risk - rate of return may not keep up with inflation.
• Interest rate risk - if rates move up, the bond is worth less to a new buyer.
• Liquidity risk - there may not be a market or ready buyer for the bond if it must be sold.
• Default risk - the issuer may encounter financial problems and not be able to redeem the bond at maturity.
• Credit quality - the credit rating of the issuer may decline, thus negatively impacting the market price of the bond if it were to be sold before maturity.

Fixed income investment ratings - based on the credit quality of the issuer -

• AAA - highest investment grade; U. S. Government obligations; very few corporations.
• AA - investment grade.
• A - investment grade.
• BBB - lowest investment grade.
• BB, C, D - not an investment grade security; Junk Bond.

Conservative, moderate and retired investors, should avoid fixed income securities with a rating below A. The three major credit rating organizations are Moody’s, Standard & Poor’s, and Fitch Ratings. Check their websites for additional details on their ratings and evaluation methodology.

Review Chapter 7 in Investing for Retirement - Surviving a Financial Tsunami.

Also, see Asset Allocation, Mutual Funds, and ETFs.