Ask The Hammer – Fixed Income Investments

Key Takeaways

• Define your fixed income philosophy: Decide if you need fixed income as a safety net (accept lower yields) or if you need it to generate specific income (accept higher risk through credit risk or duration risk).
• Calculate real returns, not just nominal yields: Subtract inflation from your investment returns to see your actual purchasing power gain or loss; a 7% bond yield losing 10-12% in price is a net loss.
• Consider fixed income alternatives like SPIAs (Single Premium Immediate Annuities) or QLACs (Qualifying Longevity Annuity Contracts) to replace portions of your bond portfolio while maintaining income guarantees.
• If you need higher yields in low rate environments, reduce equity risk elsewhere in your portfolio to maintain your overall risk tolerance rather than taking unnecessary credit or duration risk in bonds.
• Examine both yield and price components of your total return on bonds and dividend stocks; you can lose more in capital appreciation than you gain in income, creating a false sense of return.