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CHAPTER 6Fixed Income: Grasp the Potential of Bonds

Fixed income is one of the two most important asset classes in many portfolios. It often pales in comparison to the stock market, which receives much more attention. Investing in stocks can be a bit like riding a rollercoaster, while fixed income is more like riding a merry-go-round. It's often the place where you put some money aside to safeguard it against potential market crashes. Many investors underestimate the wide variety available within fixed income and the potential this asset class has to generate significant positive impact.

Investments in fixed income are in the form of debts or loans. In most circumstances, investors are paid back over a fixed period of time (or term) at a fixed interest rate. In this book, we talk about loans with a term of one year or more as fixed income, while those of a shorter duration fall into the category of cash alternatives.

Fixed income is viewed as a counterbalance to public equities because it can offer relatively safe investments that are less correlated to the stock market than most other asset classes. These investments are often used to preserve wealth, generate income, and diversify portfolios. Due to the relative stability and predictable income stream of some fixed-income investments, we tend to see individuals who are approaching retirement age shift larger percentages of their total assets into fixed income, while younger people skew their portfolios toward investments ...