If you're risk-averse and looking for a safe asset class to invest your money in for the future, fixed-income securities are a good choice. You'll run into some risk regardless of where you invest in the financial markets, but fixed income as an investment category is among the safest of them all. While fixed-income investments are often used by people who are nearing retirement age, that doesn't mean you won't have benefits if you're much younger than that, as your money is likely to be protected, and you'll probably earn better returns than what's being offered by savings accounts and certificates of deposit.
Fixed income is an asset class that by design is safer than other investment categories, such as stocks. That's because fixed-income securities provide just that -- a fixed stream of income that is established when the securities are issued and lasts for the duration of a contract. The payments are calculated based on an interest rate and a price for the fixed-income security. In addition to earning interest on your investment, you'll get back the principal amount you invested originally. So, unless the bond issuer defaults on its payments, you've got little to lose.
When you buy U.S. Treasuries, your investment is backed by the credit of the U.S. government. In fact, U.S. government-issued bonds are the standard by which other bonds are compared to determine their credit rating. The U.S. Treasury market is also the world's largest and most liquid financial market, which means it doesn't run into supply-and-demand issues that would prevent you from selling an investment even before the bond expires. U.S. Treasuries don't promise the highest returns, but you can rest assured that your principal investment will be protected.
Investment-grade bonds are those that are issued by corporations, cities or towns; they let you decide the level of risk to take. That's because investment-grade bonds have a grade that's assigned by one or more of the major credit-rating agencies in the U.S., a rating that reflects the likelihood that the issuer will default and miss payments. The tradeoff is that your returns are historically less than what's offered by riskier fixed-income investments, such as high-yield bonds, which carry lower credit scores. Nonetheless, in the eight-month period leading up to July 2012, investors earned higher returns from their safer investment-grade bonds than they were from risky high-yield bonds, according to a 2012 article in the Chicago Tribune.
Inflation is an economic condition that occurs when the amount of goods and services that the dollar can buy weakens. In an inflationary environment, $1 won't be enough to buy you today what it could have purchased yesterday. This is a threat to fixed-income investors, because returns are predetermined and won't change just because the dollar is worth less down the road. If you've purchased a bond that matures in 30 years, you are likely to miss out on returns you could have earned elsewhere. Treasury Inflation Protected Securities (TIPS) are the fixed-income category's answer to inflation because, as inflation rises, your returns are adjusted and increase, too.
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