Bond Investing

Posted On: 2006-12-06Length: 13:19

Listen to this podcast

Intrigue. Drama. Suspense. No, it's not the latest spy thriller, it's how many investors approach investing. Bond investing. In this Fidelity Personal Finance podcast, we'll attempt to demystify the mysteries of fixed income with our step-by-step guide to bond investing. We'll serve up eight tips for choosing fixed income investments, and explore the decisions an investor typically will have to take on the way to creating and maintaining bond exposure within an investment portfolio.

Let's take it one step at a time. Step one. Decide if bonds have a place in your portfolio. Now your portfolio could run the entire spectrum from 0 percent to 100 percent bond exposure. It depends on your risk tolerance and investment goals. And a large factor in both those elements is your life stage. You see, a very aggressive, and/or younger investor could have a portfolio of 100 percent stocks. Conversely, a very conservative and/or older investor might have a small allocation or no allocation to stocks. During your accumulation or saving phase of investing, bond exposure can help diversify a stock-based investment mix. That's largely because bonds often respond differently than stocks to a given economic trend or occurrence. For example, a report indicating an economic decline could cause stocks to falter, but bonds to rise as a slowing economy might lead to lower corporate profits, which is bad for stocks, as well as lower interest rates which is good for bonds. To help you decide how much to allocate to bonds versus stocks and cash, log in to the portfolio review section on fidelity.com. You'll arrive at a target asset mix that can serve as a guideline for your fixed income exposure. Portfolio review is an educational tool developed by Strategic Advisors Incorporated, a registered investment adviser, and a Fidelity investments company, and offered to use by Fidelity Brokerage services, LLC, member NYSESIPC.

Step two. How would you like your income fixed, individually or in a bond fund? Having identified a target mix of bonds to cash and stocks, you'll next decide between holding individual securities or funds. Each has merit. Your life stage may have some influence over this decision. For example, in the accumulation phase, which ranges from age 25 to 60, investors are mainly concerned with asset allocation, and the easiest and most efficient route to that is through a bond mutual fund which offers broader diversification than an individual bond. In the distribution phase, age 60 and older, when investors are typically focused on income generation, they may increasingly rely on individual bonds, in addition to bond funds. How will your fixed income exposure fulfill your need for a steady income flow? Well, as people age in their 60s and 70s for example, they tend to increase their ownership of both individual bonds and bond funds. That's from Bruce Cummings, he's a director of fixed income product management at Fidelity. Investment strategies include laddering bond maturity...