For laymen like you and me, mention investment and the stock market is what comes to mind. There are flashy headlines which can send some stocks skyrocketing, while driving others to rock bottom just as quickly. Those volatile movements in stocks or equities trading create massive money-making opportunities. It’s the stuff retail investors just eat up. (They love to talk trash about it online too.) Take the government’s selection process for the new major player in telecoms for example. The country was waiting and watching to see which company would come in to improve telecommunications in the Philippines. Stock market investors, agog over every tidbit of information, were poised to bet on the listed company that would be part of the winning consortium. But we’re not here to talk about the stock market. We are here to talk about the other asset people usually don’t talk about, fixed income.
What are fixed income assets? If you don’t know what that is, ATR Asset Management helps us out with a definition. ATRAM says, “Fixed income assets are basically debt instruments. Investors act as a lender, earning interest on their principal investment from the government or corporation issuing the debt security.” What does that mean? Simply put, it’s a loan.
Here’s another way of looking at it. I have been in a couple of situations wherein a friend or family member asks for a loan to support a new business venture. That friend or family member would say a few things to encourage me and make me feel more confident and comfortable with the loan. We would come to terms on when they would pay me back. They would offer interest or some form of return on my “investment.” Eventually, I don’t get paid back, and I chalk it up to experience. Sounds familiar? Debt instruments or fixed income assets are like that in the sense that they are investments in the form of loans. The similarity ends there, as the government or corporation issuing the debt security is required by law to pay you back with the interest agreed upon.
That might not fit the definition of ‘exciting’ for some, but ATRAM says this is exactly what makes investing in fixed income assets an attractive option for you. “You are much more certain, you will have money from it. You can plan your cash flow around the predictability of your bond coupons and your reinvestment options based on your maturity schedule. It allows for a more deterministic approach toward your investment plan.”
Stock traders would argue, the possibility of a 50% gain in a single day is far more exciting than the slow and steady gains of bonds. However, you can’t lose 50% of your investment in bonds. In fact, a 1-year treasury bill right now will earn 6.5%, not as high as the +22% which you would have made investing in stocks in 2017. But it’s better than the 15% loss, equities have suffered so far this 2018. And you would not have to guess where prices are going. You know as of today that a year from now, you will receive your principal and will have earned 6.5% in interest on it. Bonds are safer, and for some, that is more exciting.
Here’s another comparison. Fixed Income assets are like all terrain vehicles. Steady and sturdy, they are reliable in almost every situation. It’s like those classic Defenders or Land Cruisers. These guys can go anywhere, in any weather! They are safe even during financial storms. (I’ve seen quite a few banks make a lot of money trading fixed income assets even in volatile economic conditions.) Fixed income can have an extra gear in terms of capital gains too. ATR Asset management says with inflation moderating (raising the possibility of interest rates reversing), bonds carrying the current interest rates can become more valuable. Meanwhile equities or stocks are like sports cars. Flooring the gas can create a lot of acceleration and speed. The ride in a Ferrari or a Bugatti can be exhilarating, and these would definitely leave any old “truck” behind. Fortunes can be made at the stock market. However sports cars are also prone to life threatening crashes, specially if handled by inexperienced drivers. Its almost night and day between these two.
If you don’t feel like favoring one over the other, don’t worry, you don’t have to. Fund managers, mutual funds, and investment banks all allow prospective investors to tap into the right mix of financial assets, tailored to the risk appetite and investment goals of each. These investment professionals would also be very happy to just sit down and talk shop and explain just how to invest efficiently and effectively. Can one get rich investing in fixed income? ATRAM says yes. “Inherent in wealth accumulation is the power of compounding. This means that interest earned on an investment is reinvested as well, earning interest of its own and enhancing return potential in a passive but consistent manner. The larger your investment, the larger in absolute terms the interest you earn will be. And as the title fixed income implies, time is your ally. The sooner you invest, the more time you have to earn.”
I am not an investment professional, but I do invest. Personally, I like to mix it up. Funds for future needs which I do not want to see disappear overnight, like for my child’s education, are stuck in more stable fixed income assets. Excess cash which I don’t need right now, (after all other needs including savings are funded) go into more aggressive mutual funds which target equities. There are no hard and fast rules. The best recommendation really is to learn as much as possible. If this is the first time you’ve heard about fixed income assets, there is a lot more to learn about investment. I know I certainly need to learn more as well. The most important thing to remember is the best time to start is now: when most are heading to the mall or to his favored online shopping platform, make it the season to start investing.