The Simplicity of Investing Differently
The stock market has been on a roller coaster ride recently, with everything from COVID to wars to inflation and high interest rates all contributing to stock market volatility. The stock market is consistently inconsistent, but the past few years have seen extra volatility.
While the average investor is used to market volatility, with some even relishing it, a significant segment of investors prefer certain assets in uncertain economic times. These smart investors insulate their portfolios from market ups and downs by investing in fixed-income investments, but not of the type Wall Street or your neighbors have in mind. These investors prefer alternative fixed-income options.
Why fixed income?
Fixed-income investments offer a predictable stream of income, but the stigma of low returns can be a turn-off for investors who buy into Wall Street’s high-risk, high-reward doctrine and believe that fixed income = low returns. That may be true of traditional fixed-income investments like treasuries, CDs, money market accounts, and savings accounts, but alternative fixed-income assets buck the trend by offering high returns at low risk.
Predictable high returns are particularly attractive during uncertain times.
Peace of Mind.
The certainty of fixed income returns, especially low-risk, high-return options, provides peace of mind and comfort in the face of unpredictable stock and job markets. Passive fixed income returns—especially ones that can compensate for job losses—offer a tremendous amount of comfort during uncertain economic times.
With a fixed income stream, investors are more able to plan their finances as well as their lives around certainty vs. unpredictability. For example, planning for early retirement and such at a time with a certain amount of funds is much easier with fixed income streams that go into the calculation vs. unpredictable stock market returns. Take the Great Recession, for example. In 2008, many potential retirees who had planned to retire that year had their plans completely upended when the stock market crashed in the wake of the subprime and real estate busts.
Buffer from Market Madness.
Alternative fixed-income investments are buffered by investor sentiment and behavior, which are the main driving forces behind stock movements. Anything from a remark on cable news to a social media post to world developments, etc., can influence investor sentiment and set off the markets one way or another.
Alternative fixed-income assets that are illiquid are insulated from wild market swings brought on by investor fear on one end of the spectrum and greed on the other. This illiquidity buffers fixed-income investors from short-term market sentiment and investor emotions that contribute to wild stock fluctuations.
Being insulated from irrational investor exuberance or pessimism that can dominate equity markets helps smart investors prevent getting caught up in the same type of hype and offers calm in the middle of an economic storm.
Alternative fixed-income investments are ideal for diversifying an investment portfolio that includes alternative equity investments. The certainty of fixed returns and low risk are a perfect counter to equity investments that come with higher risk but higher upside. When equities perform, the portfolio benefits from the upside, and when equities underperform, fixed returns pick up the slack.
Fixed-income investments come in all shapes and sizes and cater to a wide range of investment horizons, from short-term to long-term. They are flexible and are ideal for aligning with various financial goals. Whether investing for growth through reinvestment of returns or for capital preservation for retirees and potential retirees, fixed-income assets are ideal for a variety of investment strategies.
Fixed-income assets are easy to understand and are more accessible as a result. There is no need to understand complex financial statements and pro-formas and how those elements all factor into the performance of an equity investment. With fixed-income investments, you know exactly how much of a return you will receive and when you’ll receive it.
Analyze the implications of investing in fixed income during periods of low interest rates and how investors navigate this challenge.
Alternative fixed-income investments are the perfect counter to economic uncertainty and investor anxiety. They offer a certain stream of income in any economic environment, giving investors peace of mind in uncertain times.
For 2024, consider the simplicity of investing differently. Consider the simplicity and certainty of alternative fixed-income assets.