Selecting fixed income
Learn how to decide which fixed income investments best fit your needs.
Find the bond that's right for you
Many investors have told me they want to invest in bonds, but aren't sure how to do it, or which bonds might be best for them.
To a large extent, it depends on your goals, your risk tolerance, your timeline, and how active you want to be in managing your portfolio.
Let's start with what kind of bonds you should consider. Key questions here are: what's your primary goal, how long is your investing timeframe, and how much risk do you want to take?
If you expect to need the money within four years, or want to take the least amount of risk, your primary goal is likely to be capital preservation. Investments that can be appropriate include bank CDs or short-term bond funds.
If your investing timeline is longer, and you're willing to take more risk in order to potentially earn higher yields, you might consider longer-term Treasury bonds or investment-grade corporate or municipal bonds.
And if your primary goal is income, and you're willing to take the greatest amount of risk, think about emerging market bonds or long-term Treasuries.
Once you've decided what to invest in, the next step is how to do it.
A first step here is how much you have to invest in fixed income securities.
For example, we recommend at least $100,000 if you intend to invest in individual bonds, so you can buy enough bonds from different issuers to create an adequately diversified portfolio.
Many separately managed accounts have minimum investment levels of about $250,000
The other question is how actively you want to manage your portfolio. If you're an experienced fixed income investor and want to do it yourself, individual bonds are an option.
If you'd rather leave the management to a professional, consider mutual funds or a separately managed account.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.
Investing involves risk, including loss of principal. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
Certificates of deposit are issued by various FDIC-insured institutions, and are subject to change and system access. Unlike mutual funds, certificates of deposit offer a fixed rate of return and are FDIC-insured. There may be costs associated with early redemption and possible market value adjustment.
Tax-exempt bonds are not necessarily suitable for all investors. Information related to a security's tax-exempt status (federal and in-state) is obtained from third parties, and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the alternative minimum tax. Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.
Preferred securities are often callable, meaning the issuing company may redeem the security at a certain price after a certain date. Such call features may affect yield. Preferred securities generally have lower credit ratings and a lower claim to assets than the issuer's individual bonds. Like bonds, prices of preferred securities tend to move inversely with interest rates, so they are subject to increased loss of principal during periods of rising interest rates. Investment value will fluctuate, and preferred securities, when sold before maturity, may be worth more or less than original cost. Preferred securities are subject to various other risks including changes in interest rates and credit quality, default risks, market valuations, liquidity, prepayments, early redemption, deferral risk, corporate events, tax ramifications, and other factors.
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Define your goals
Whether you're looking to save for a near-term expense, add stability to your portfolio, or create a revenue stream, there are fixed income products for you to consider.
- Financial goal
- Fixed income products to consider
Financial goalI want to protect my investment>Fixed income products to consider
- Short-term CDs (Certificates of Deposit)
- Short-term Treasuries
- Short-term investment-grade municipal or corporate bonds
- Short-term bond funds
Financial goalI want to add income and balance to my portfolio>Fixed income products to consider
- Short- and intermediate-term Treasuries
- Short- and intermediate-term agency bonds
- Short- and intermediate-term international developed-market bonds
- Short- and intermediate-term investment-grade corporate or municipal bonds
- Short-term to intermediate-term bond funds
- Agency mortgage-backed securities
Financial goalI want to generate more interest income>Fixed income products to consider
- Long-term Treasury or corporate or municipal bonds
- Emerging market bonds or bond funds
- Preferred securities or preferred securities funds
Select an investment allocation strategy
Create a mix of fixed income investments that balance your portfolio to help meet your goals. These five sample asset allocation plans show how fixed income can be adjusted in your overall portfolio.
For investors who seek current income and stability, and are less concerned about growth.
For investors who seek current income and stability, with modest potential for increase in the value of their investments.
For long-term investors who don't need current income and want some growth potential. Likely to have some fluctuations in value, but less volatility than the overall equity market.
For long-term investors who want good growth potential and don't need current income. Likely to have a fair amount of volatility, but not as much as a portfolio invested exclusively in equities.
For long-term investors who want high growth potential and don't need current income. May have substantial year-to-year volatility in value in exchange for potentially high long-term returns.
Want help determining an appropriate allocation type for you?
Want help determining an appropriate allocation type for you?
Use our Interactive Profile Questionnaire to find a suitable investment strategy.
Traditionally, longer-term bonds produce higher yields but also have higher interest rate risk—the risk that the value of a bond will fall if interest rates rise. Thus, your time frame may be one factor in determining the amount of interest rate risk you're willing to take on.
- Low interest rate risk
- Medium interest rate risk
- High interest rate risk
Maturity timeframe>Low interest rate risk0 - 4 years average maturity>Medium interest rate risk4 - 10 years average maturity>High interest rate risk10+ years average maturity>
It's also important to consider credit risk—the chance that the issuer of a bond will not be able to repay its debt obligations. With riskier lenders, the return may be higher, but the odds of an investor losing their principal rise.
- Low credit risk
- Medium credit risk
- High credit risk
Fixed income products>Low credit riskCDs, Treasuries, agency bonds, agency mortgage-backed securities>Medium credit riskInvestment-grade corporate or municipal bonds, international developed market bonds>High credit riskPreferred securities, emerging market debt, high-yield bonds, high-yield municipal bonds, bank loans>
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