Fixed Income Investments

By:  Chuck Hughes

The following is an excerpt from Chuck Hughes’ The Failsafe Now Financial Program

The “Rodney Dangerfield’s” of the Investment World

The Case for Asset Allocation

Fixed income investments are often overlooked by the investment community, and fixed income returns are considered “boring” compared to returns that can be achieved by picking the right stocks.  During the 1990s investors became accustomed to unrealistic high returns from the stock market.  From 1990 to 1999, 90 percent of all the money ever invested in the equity mutual fund market flowed into the market during that ten-year period.  There were few market declines of any consequence during this period.  That meant that 90 percent of the money invested in equity mutual funds had never experienced a losing year or more than a ten percent loss for a sustained period of time.

Year after year, after receiving their annual IRA and 401K statements, investors could see how much better their stock funds were performing compared to their bond and money market funds.  Investors gradually allocated more of their funds to stocks each year to the point that virtually all of their money was going into stocks.  This strategy was reinforced by the “experts” who said that stocks were a sure thing if held for the long term.  Fixed income investing lost respect with investors as income returns paled in comparison to the returns from the ever-climbing stock market.  As a result, stocks became extremely overvalued and bonds became undervalued. 

With today’s high risk, volatile stock market it makes sense to allocate a portion of your investment portfolio to investment grade fixed income securities.  These would include:

• US Treasury Bills (90 days to one year maturity)
• US Treasury Notes (one to ten year maturity)
• US Bonds (ten to thirty year maturity)
• US Treasury Zero Coupon Securities (one to thirty year maturity)
• US Government Agency Securities issues by Agencies such as the Federal Farm Credit Bank, Federal Home Loan Bank, Student Loan Marketing and the Tennessee Valley Authority. 
• Investment grade preferred stocks rated BBB or higher by Standard and Poor’s.

Investment Grade Fixed Income Investments Can Reduce Risk and Volatility in an Investment Portfolio

When you combine fixed income securities with a stock portfolio you have the added benefit of reducing the volatility and “smoothing out” the return in your investment portfolio.  Recently, studies done by Ibbotson Associates show that since January 1990 a portfolio of 60% S&P 500 stocks and 40% bonds was less volatile than a portfolio of 100% S&P 500 stocks.

Normally when economic growth slows or we enter a recession, fixed income securities do well as the Federal Reserve lowers interest rates to stimulate economic growth.  This can help off set the stock market losses that normally occur when corporate profits decline during an economic slowdown.  This was certainly the case in years 2000-2002 when stocks “took a beating” and fixed income securities produced a good return. In virtually every bear market in stocks over the last 100 years, Intermediate-Term Treasuries rose in price.

Down Years for the S&P 500 Index versus Return for Treasury Bills

The graph below demonstrates that since 1950 Treasury Bills produced positive returns for every year the S&P 500 Index produced a negative return.

Down Years for the S&P 500 Index versus Return for 5-Year Treasury Notes

5-year Treasury Notes also produced a positive income return each year the S&P Index produced a negative return (see graph below).  There were four years in which the income return on 5-Year Treasury Notes exceeded the loss for the S&P 500 Index thereby producing a positive return for those equally invested in the S&P 500 Index and 5-Year Treasury Notes.