Fixed income assets: the defensive anchor for your portfolio
Fixed income investments play a defensive role within your investment portfolio. But how are corporate bonds compared with other investments available within the fixed income asset class?
Corporate bonds compared with other investments
Australian Government bonds are among the safest investments available to investors. Find out more about Australian government bonds.
Term deposits (TDs)
Term deposits are not tradeable like shares, ETFs and XTBs but they are fixed income investments. Find out more about term deposits.
Corporate bonds OTC (over-the-counter)
Before XTBs on ASX, dealing in corporate bonds was mostly the domain of institutional and sophisticated (“wealthy”) investors trading them over-the-counter. Find out more about corporate bonds OTC.
ETFs and managed funds
Hybrids are not part of the fixed income world because they have too many equity features to be defensive. Find out more about hybrids.
Balancing the choice of risk vs return
Your tolerance to risk is an important factor to consider before making your investment choice. Everyone has a different tolerance to risk and should aim to be comfortable with the level of risk associated with their investment selections.
REMEMBER: More return ALWAYS equals more risk.
Don’t be fooled by claims of a low-risk AND high-return investment.
Bonds are low-risk AND low-return investments.
The risk / return chart below demonstrates where each type of investment fits on the risk vs reward spectrum.
The Risk vs Reward Spectrum
A place for everything and everything in its place
A key recommendation for any investment portfolio is to diversify.
This means you should hold a variety of investments across the different asset classes. This will leave you less exposed to events that hit a particular asset class, such as an equity, bond, or property market crash.
However, it is also essential to have the right securities in the appropriate area of your portfolio. Assets that carry higher risk should deliver higher returns, but are also likely to have far more volatile returns. They may fit well in the growth area of your portfolio.
For the defensive part, the important question is: What investments provide capital-stable returns with reasonable income?:
Fixed income investments like:
- Australian government bonds
- Term deposits
- Corporate bonds and XTBs over them or
- Managed Funds or ETFs over these assets
will all provide that defensive investment profile.