A fixed-income portfolio is a type of investment portfolio that focuses on fixed-income securities like bonds, CDs, and money market instruments. The goal of a fixed-income portfolio is to provide stable income and preserve capital while minimizing risk. Let's break down the key aspects of building and managing a fixed-income portfolio.

Defining Fixed-Income Assets

Fixed-income assets are investments that pay out fixed or predictable cash flows over time. The most common types are bonds, certificates of deposit (CDs), money market accounts, annuities, and cash. Bonds make up the bulk of most fixed-income portfolios. When you buy a bond, you are lending money to a company or government entity. In return, they make regular interest payments and repay the principal upon maturity.

Advantages of Fixed-Income Investing

There are several potential benefits to fixed-income investing:

• Stable income. Fixed-income securities pay out known cash flows at regular intervals. This provides retirement income or cash for living expenses.
• Lower volatility. Fixed-income investments are less vulnerable to price swings than stocks. This helps manage portfolio risk.
• Diversification. Adding fixed-income provides balance to an equity-heavy portfolio. Bonds often move independently from stocks.
• Capital preservation. Fixed-income is ideal for nearing retirement when preserving wealth takes priority over growth.

Crafting an Investment Policy Statement

A key step in building a fixed-income portfolio is creating an investment policy statement (IPS). This document outlines the purpose, goals, constraints, and metrics that will guide investment decisions. Key factors to consider are:

• Time horizon. Will you need to withdraw funds soon? A longer horizon allows more flexibility.
• Risk tolerance. How much volatility can you withstand before selling in a downturn?
• Income needs. Do you require regular income for expenses? Focus on bonds with frequent coupon payments.
• Diversification goals. IPGs often include target allocations across bond sectors, credit quality, and maturity dates.

Implementing a Fixed-Income Allocation

Once the IPS is set, it's time to select investments. The portfolio can include individual bonds, bond mutual funds and ETFs, CDs, and cash equivalents. Consider these tips:

• Prioritize investment-grade bonds for stability. Government and high-quality corporate bonds carry less risk.
• Ladder maturities over time. This provides continuous income and reinvestment opportunities.
• Use short-duration bonds as rates rise. Reduce interest rate sensitivity.
• Favor diversified bond funds for simplicity. They provide wide exposure with minimal legwork.
• Allocate a portion to cash. This covers short-term income needs and provides dry powder to reinvest if bond prices drop.

Monitoring and Rebalancing

An IPS typically prescribes rebalancing ranges for each asset class. If allocations drift over time, trades restore targets. Other portfolio maintenance tips:

• Review holdings for credit downgrades. Swap weaker bonds for stronger ones when possible.
• Reinvest interest payments and maturing principal. Keep the portfolio working at full capacity.
• Harvest tax losses when prudent. Sell underperforming bonds to offset gains elsewhere.
• Update the IPS over time. Make sure the portfolio aligns with evolving needs and market outlooks.

Still wondering “what is a fixed income portfolio?” Get in touch with Dataverse!

The stability of fixed-income investing comes with nuance. Following a detailed IPS and keeping close tabs on holdings is key to realizing the benefits of bonds and generating reliable retirement income. Reach out if we can help craft your fixed-income portfolio!