Fixed income investing traditionally has been categorized as “safer” when compared to investing in equities.  Why is that?  Purchasing high quality debt tends to generate less volatility in returns when compared to buying companies.  With less up/down in price, the future growth potential in fixed income is limited.  Equities inherently have more room for growth and contraction; therefore, their returns may be larger or smaller when compared to fixed income.  How does an investor choose the right combination of each for their portfolio?

The first thing all investors should consider before investing is defining what they most want to accomplish.  Assigning a purpose to various investment accounts will help manage expectations.  Clarifying your goals first keeps the focus on what you want versus what might be possible in the market.  It’s easy for investors to be swayed by potential returns instead of focusing on each investment’s role.

In addition to having a job description, it’s important to have a rough timeline on how long your dollars may be invested.  Are you investing for five years or perhaps two decades or longer?  The return of your monies is important so you can spend them as you want.  Knowing this, it’s important to understand the amount of time you have to work with.

Periodically, checking in and revisiting investments based on their purpose may help investors gauge their progress.  What changes are necessary, if any?  New information, a revised timeline, or updated priorities may arrive as your investments contract and expand.  Before changes are made, ask yourself this question.  “What’s fundamentally changed in my goals and timing that require me to make a change in my investments now?”

The last three years have been a challenge for all investors.  Even those discipled with a plan may consider making changes.  Successful investors recognize the value in having a process that’s not influenced by current events.  A repeatable process supplies a framework to revisit that’s not reactive to what’s happening now.

This allows investors to act with purpose and intent based on their priorities.  If nothing has changed to your goals, then why would you proactively shuffle your investments?  Staying focused on the big picture may become difficult as time passes.  It’s natural to think making proactive changes is part of the investment process.  This is evidenced by shrinking holding periods for many investments.  Where investments begin is often not where they end even after a brief 24 months.

Investing in fixed income and equities requires an awareness of tradeoffs and costs.  When selecting fixed income investments make sure you are aware of these four considerations:

  • Credit rating. How strong are the companies backing this debt?
  • How long will the debt stretch?
  • How liquid are these investments?
  • What’s the tax and income impact?

There are thousands of equities to consider when investing.  You can sort companies by their size, revenue, location, and the industry they work in.  Companies can be owned individually, in a mutual fund, and in an exchange traded fund.  Each has its own costs and benefits, including taxation based on the holding period.

Investing in fixed income will generate different outcomes than investing in companies.  At any given time, one may be outperforming the other, and vice versa.  The key is not judging your investment selection by performance.  Performance is always an output, and seasoned investors embrace inputs.  Inputs are the one thing that may be controlled such as where and how much to invest.

Inflation and rising costs have an impact on all investments.  Recognizing the historic 3% rising cost of life will trim down returns in both fixed income and equities overtime.  Knowing this from the onset may allow investors to create a plan and select investments that support sustainable spending.

Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.

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