This is a different risk when compared to the volatility of equities. But, after all, risk too.
That is a sufficient reason not to act blindly, but to act conveniently, applying the most optimal formula.
Bonds are complex instruments, investing in bonds is not escaping the risk that any investment has (except cash). It is a different risk than equities, but risk without a doubt. There has always been an impression on the investor experiencing equity volatility that the safest place is fixed income, bonds.
The reality is that it is important to know the risk of this investment and look for the most optimal formula to acquire these products.
A typical reaction of the fixed income investor is the purchase of fixed income investment funds.
It is the most appropriate way, apparently. The simplicity of an investment fund makes it the right product for the new investor. The convenience of buying fixed income funds has been the reason that this product has been the investor's favorite for this type of income.
Beware! Fixed income bonds can also be losers
If we look at the results in any fixed income fund in recent years, we will see that despite the fact that interest rates have fallen to historical levels, very few have benefits.
This reality puzzles many investors who were looking for a small but safe return and suddenly find themselves at a loss.
The answer to this is that it must be recognized that a fixed income investment fund is not a bond even though it is made up of them.
The characteristic of investment funds of not guaranteeing returns has created in this country and in fixed income investors a need to seek and establish relationships with investment advisers specialized in fixed income.
When a bond is purchased, which is an obligation, whether from an entity or company, a government agency, the Treasury department, etc., an interest rate (coupon) is established that is paid periodically.
If the investor waits for the maturity of that bond, he receives the amount invested plus the interest for that period. This guarantees the return on investment.
It is a fixed income investment fund, the composition of which is bonds, which are bought and sold according to the strategies of the manager of the same.
This produces expenses and, in many cases, losses that, if added to the fund's management expenses, can lead to overall losses.
Ideal way to invest in fixed income
The ideal way to invest in fixed income under the guidance of a specialized advisor is to create a portfolio of staggered maturity bonds, which, when due, are renewed.
In this way, it is never lost assuming that the quality of the debt is of quality.
The ideal way to invest in fixed income is a portfolio or portfolio of individual bonds, diversifying the number of entities that issue that debt and the maturities.
This way of investing in fixed income is the one that is developing these days in an important way in the North American market.
The two risks of investing in fixed income are the quality of the paper that, in the event of bankruptcy or suspension of payments, the principal may not pay, so quality must be chosen; the second is the movement of interest rates. When they go up, the value of the paper goes down and vice versa.
More recommendations
At these moments of historically low interest rates, and with the Federal Reserve ready to raise rates as soon as the economic recovery matures (perhaps in September), it is convenient not to buy individual bonds in the long term but in the short term (no more than two years).
When rates rise and reach a historically high level, it will be possible to buy at a higher maturity and guarantee yields.
This investor discouragement will pass once the economy begins to mature in its growth and time helps to forget the current bad times. Until that happens, the fixed income investment will be the investor's refuge.
