Start the new year with a long-term benefit
Doug Drabik discusses fixed income market conditions and offers insight for bond investors.
After three consecutive years of increasing stock prices, it can feel comfortable and certainly satisfying to ride the trend. Investors may want to capture the boon rather than be complacent with it. Long-term financial health can go hand-in-hand with the opportunities the markets have laid out.
In general, stocks seek to maximize what we investment nerds would describe as total return. Total return combines income earned from an investment with price appreciation. You’ve heard the phrase “buy low, sell high”. In total return terms, that means buying a stock at $100 per share and selling it at a higher price, say $125 per share. During the holding period, the stock may pay a dividend (income), but typically, an investor’s primary return comes from price appreciation. This is also why investors seek investment statements that boast price increases.
The less exciting but generally less volatile portfolio component is fixed income. For many investors, these are income line items. Investors do not typically purchase bonds for the allure of price appreciation, but rather for the interest they produce. Although it may be psychologically challenging to separate investment statement price prints, investors who hold individual bonds to maturity eliminate any holding-period price effects, in which total return is solely represented by the income earned over that holding period. This attribute pertains to individual bonds, not most other packaged products that hold bonds. Individual bonds and bond UITs have a stated maturity that provides a finite time during which an investor’s capital is working. At maturity, barring a default, that capital investment is returned.
While stocks are climbing to record highs, investors are being given an accompanying opportunity. Interest rates have remained elevated; thus, income-producing bonds can provide investors with a more conservative way to lock in some of the windfall that stocks have provided. Rebalancing a portfolio keeps long-term planning on track, allows remaining stocks to continue growing with future market gains, allocates dollars to wealth-preserving assets, and generates beneficial income from elevated interest rates.
If there was ever a way to script a celebrated way for investors to start a new year, this is it. We don’t always get a “win–win” scenario, but investors have an opportunity to start the new year with a long-term benefit.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
