There are always questions about fixed income or bond investments. The reason: People need bonds in their portfolios to provide investment stability and to lower risk. The problem: Bonds are one of the least understood vehicles in the investing world. Here are three bond categories that have and should continue to provide stable returns for the next few months, if not years.
First, let's consider short-term bonds. A short-term bond is typically a bond or bond fund that matures in less than three years. Everyone needs fixed income in their portfolio, but in an interest rate environment that is about to significantly increase (as the stock market increases … hopefully) longer-term bonds will not be the place to invest. As interest rates increase, bond prices decrease; the longer the bond term, the greater the decrease in price. Therefore, shorter-term bonds can be less of a problem as interest rates increase.
Short-term bond options include short-term government bonds, short-term corporate bonds, bank loan funds, ultra-short-term bonds and treasuries.
Second, high-yield bonds are offered by issuers with less credit quality, but tend to carry a higher yield because of the additional risk. Many high-yield bonds are offered by solid companies going through a bad time, which is a benefit in this environment. These companies cannot get bank financing so they turn to issuing debt. These investments can provide a good yield and some capital growth as the market and the issuing company's financials improve.
Third, global bonds provide the opportunity to invest in bonds from markets throughout the globe. With more markets, there are more options, which potentially bring better yields, especially since the domestic bond market is experiencing difficulty. The best way to invest in global bonds is through a mutual fund. The manager of the fund will make buying and selling decisions about which bonds in which markets. Emerging market debt, a type of global bond, invests in less developed countries. These type of bonds can be thought of high-yield global debt.
Each of these categories offers some advantage, but there are some issues that could greatly affect your outcome. Primarily, the U.S. midterm elections and the Federal Reserve's current quantitative easing program could throw a wrench in the entire fixed income category. As both issues unfold, the above fixed income options should offer some great opportunities to include bonds in your portfolio. Knowing about them is half the battle.
Kelly Campbell, Certified Financial Planner and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, A Registered Investment Advisor in Fairfax, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.