What do we mean by allocation? Think of it like your household where it is quite obvious how different assets serve different purposes. Equity allocated to your house not only provides shelter, but it provides intrinsic value for memories and traditions. It also is anticipated to generate wealth through appreciation over time. Money allocated to your car, which depreciates at the moment of purchase, provides a means to an end by delivering a service of transportation to your job, place of worship, social engagements, etc. Most of us don’t go with just one or the other because they support the bigger picture each plays in their role in our daily life.
Think of your portfolio as groups of assets designed to provide their specific role. The transmitted message we receive sometimes leads us to believe that our portfolio plan should change with every shift in rates, political declaration or newly forecasted future “certainty.” However, various portfolio allocations, just like household money allocations, provide very different services and need to be treated very differently.
Rate shifts and pertinent news may persuade an investor to be watchful and reactive with their stocks or other growth assets. This portfolio allocation relies on appreciation as part of its total return. Fixed income allocation serves a very different role and is often not reliant upon total return benefits resulting from price appreciation. Fixed income allocation is regularly implemented to protect wealth and balance other asset allocations. The planning is seldom short term or concerned about capturing momentary market opportunities but rather is about long term planning and wealth preservation.
More volatility and/or low interest rates can influence portfolio change but the constant is often the fixed income allocation. Many fixed income allocations rely on … well, their “fixed income.” An investor who holds fixed income to maturity (barring default), will be provided the income, cash flow and return of face value, regardless of interest rate shifts, political declarations or news forecasts.
Check your portfolio list twice. Treat your growth assets and your fixed income assets as two distinct portfolio allocations so that they may each provide their intended benefits. This makes your allocation quite nice!
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
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