Alternative Investments and Fixed Income
Our fixed income portfolios are tailored to meet each individual client’s specific needs. First we work with clients to determine what their specific goals, objectives, time frame and risk tolerance is. We then begin building a fixed income portfolio by taking into consideration variables such as the type of account (taxable or tax deferred), maturities, credit ratings and geography. Where appropriate we recommend a mix of municipal bonds, government bonds, corporate bonds, cd’s, mutual funds, preferred stocks and real estate investment trust’s. Our goal is to maximize the income of the portfolio without taking any unnecessary risk.
A bond is a type of fixed income debt instrument issued by a governmental entity or by a private or publicly traded company. When analyzing a bond, you should examine the interest, taxation, maturity, rating, yield and call features.
For many people, the first consideration in buying a bond is how the interest is taxed. In most cases, the interest on bonds issued by state and local municipalities is free from federal and sometimes state taxation, for certain people Alternative Minimum Tax may apply. Bonds issued by private or publicly traded companies are fully taxable. Bonds issued by the U.S. government are free from state taxes but fully taxable for federal income tax purposes. Thus whether you buy a taxable or tax-advantaged bond will depend, in part on your tax bracket. If you are in high tax bracket, buying municipal bond may make sense for you. If you are not in a high tax bracket, then purchasing a fully taxable bond may be the bust course for you.
A second issue to consider in buying bonds is the maturity date. In other words, when will the bond be paid off by the issuer? Bonds are issued with varying maturities—some bonds have very short maturities (less than a year); other bonds have maturities up to 30 years. Bonds with a longer maturity tend to pay higher interest rates, but the price of the underlying bond may fluctuate more in the marketplace than that of a shorter-term bond. (Bonds often trade in the secondary market after they have been issued). Bonds with shorter maturities tend to pay lower interest rates, but the underlying price of the bond may not fluctuate as much as that of longer term bonds. Your own time horizon will also be a factor in your decision.
A third factor to consider is the credit rating of the issuer (i.e., the financial strength of the company or entity issuing the security). The bonds of less financially strong issuers tend to pay higher interest rates, but may not be suitable for all investors. Bonds issued by the U.S. government, on the other hand, typically pay the lowest interest rates (for a given maturity). There is a tradeoff between the interest rate you receive and the risk associated with the bond.
Examples of Alternative Investments and Fixed Income