10 minute read

When it comes to investing, stocks seem to steal the spotlight. A truly well-rounded portfolio, however, often isn't complete without the stability that fixed-income assets provide. Whether you're a young professional building out your portfolio, a mid-career investor looking for a balance between growth and stability, or a retiree focused on preserving wealth, fixed income can work for nearly any investor.

And with interest rates at their highest levels in nearly 25 years, it’s a great time to explore how bonds and other fixed-income securities can work for you. Let’s simplify fixed-income investing, explore its many benefits, and see how you can use it in your investment strategy.

Key takeaways 

• Fixed income offers more than just steady payouts. It can help preserve your wealth and act as a powerful diversification tool in your portfolio.
• The fixed-income universe is vast. From ultra-safe government bonds to higher-yielding corporate debt, there's an instrument for every risk tolerance. Bond ETFs and funds offer an accessible way to gain broad exposure.
• Diversification within fixed income is key. Different bonds perform differently across various economic environments. The current yield environment for bonds is particularly attractive, with interest rates at their highest levels in nearly 25 years.
• Your optimal fixed-income strategy will evolve. Young professionals might start with a small allocation, while those nearing retirement may shift more heavily towards bonds. Regardless of age, fixed income excels at helping achieve shorter-term financial goals due to its lower volatility.
• StashAway offers a range of fixed-income solutions. From our lower-risk General Investing portfolios to fully-customisable Flexible Portfolios, there's likely something to suit your needs. 
• Fixed income is a versatile tool for any investor. The key is aligning your fixed-income investments with your overall financial plan and goals.

What is fixed income? 

Fixed income is a cornerstone of the investing world. The global fixed-income market is one of the largest, estimated to be valued at US$130 trillion as of 20221 – that’s larger than the US$101 trillion market capitalisation for equities. As a unique asset class away from equities, fixed income can act as a counterbalance to riskier assets, or simply as a means to generate a steady stream of income.

The asset class may seem complex at first glance, but at its core, it's rather straightforward. Any investment that regularly pays out a fixed amount of interest on a set schedule can be considered fixed income, as long as the payments are predictable.

The most common type is a bond. When you buy a bond, you're essentially lending money to the issuer, which could be a government or corporation. In return for this loan, the issuer makes two key promises:

1. To pay you interest (often called a coupon) at regular intervals until the bond matures.
2. To repay the original amount you lent (the principal) when the bond reaches its maturity date.

(We’ve prepared a handy guide at the end, Bond Market Basics, for terms you might come across!)

These are the reasons that make fixed income an attractive asset class for many investors:

Income generation: Unlike stocks, where dividend payments are given out at the company's discretion, most fixed-income securities provide a stream of payouts. This regular cash flow can be particularly useful for supplementing your regular income or building towards a financial goal.

Capital preservation: Fixed-income investments, especially bonds of investment-grade credit quality and above, tend to be less volatile than stocks. This stability makes them an effective tool for preserving capital, which becomes increasingly important as you approach major financial milestones or retirement.

Portfolio diversification: A well-diversified portfolio typically includes exposure to different asset classes that don't always move in the same direction. Fixed-income investments often have a low or negative correlation with stocks2 – meaning they may perform differently under various market conditions. High-quality bonds often act as a "safe haven," offsetting losses from other assets.

The types of fixed income 

The fixed-income market offers a diverse range of options, each with its own risk-return profile. From short-term money market funds (MMFs), to 10-year government bonds, there's likely a fixed-income instrument that aligns with your risk tolerance, goals, and investment timeline.

Government bonds: These are generally considered the safest fixed-income investments, as they're backed by governments themselves. However, this safety typically comes with lower yields compared to other types of bonds. A few examples – all of varying maturities – include US Treasuries (T-bonds, T-notes, and T-bills), Singapore Savings Bonds (SSBs), and Malaysian Government Securities (MGS). 

Corporate bonds: These are issued by companies to raise capital for a variety of purposes. While typically riskier than government-issued debt, corporate bonds usually offer higher yields to compensate. Corporate bonds can be categorised into two main groups:

1. Investment-grade bonds: Issued by companies with higher credit ratings, these bonds offer moderate yields with a lower risk of default.
2. High-yield bonds: Issued by companies with lower credit ratings, these bonds offer higher yields but can come with an increased risk of default.

International bonds: Investing in bonds issued by foreign governments or corporations can offer diversification benefits. Bonds from emerging markets in particular tend to offer higher yields, at the cost of added risk. Keep in mind, however, that these can add an element of currency risk to your portfolio – that is, the risk that the foreign currency depreciates in value versus your home currency.

Money market funds (MMFs): MMFs invest in highly liquid, short-term debt securities that typically mature in a year or less. Because of the lower duration of these assets, MMFs are less exposed to interest rate fluctuations, making them a good place to park cash you might need in the short term.

Bond ETFs and funds: Rather than individual bonds, you can choose to invest in a diversified portfolio of bonds through exchange-traded funds (ETFs) or mutual funds. These offer several advantages:

• Diversification: A single fund can hold hundreds or thousands of individual bonds across various types – reducing your overall risk.
• Accessibility: You gain exposure to a broad range of bonds with a relatively small investment.
• Professional management: Fund managers handle the complexities of bond selection and portfolio construction for you.

US active fixed-income fund managers have outperformed their passive counterparts by 0.23 percentage points over the past 10 years3. Interestingly, it's the opposite for equity funds, where active fund managers underperformed by 0.93 percentage points – possibly due to the more efficient nature of the stock market.

Diversification within fixed income 

Because fixed-income instruments exist on a wide spectrum of risk-returns, diversification within the asset class itself can be powerful. Given that different types of bonds perform differently, a well-constructed, resilient portfolio will play to the strengths of each. A well-diversified fixed-income portfolio might include:

• Government bonds for stability.
• International bonds for geographic diversification.
• Investment-grade corporate bonds for a balance of yield and safety.
• High-yield bonds for potentially higher returns.

Our Economic Regime Asset Allocation (ERAA®) investment framework adjusts allocations based on the economic regime. For instance, in the recent environment of higher inflation, it called for increased allocations to ultra-short-dated bonds in our lower-risk portfolios to take advantage of their high yields.

The current yield environment for bonds is particularly attractive, with interest rates at their highest levels in nearly 25 years. This presents an opportunity for fixed-income investors, as there's historically been a strong relationship between starting yields and subsequent returns. This is why “locking in” rates can be advantageous – you’re securing a favourable yield that may not be available later if they decline.

Having said that, it's important to keep in mind that trying to time the market can be counterproductive. Instead, consider an approach that aligns with your goals. For example, if you’re saving for a down payment on a house in five years, you can invest in a diversified bond portfolio with an average maturity that matches that time horizon – aligning with when you'll need the money.

Fixed-income strategies for any investor 

Fixed-income investing is versatile – it can be tailored to suit investors at any stage of their financial journey. Whether you're just starting out or nearing retirement, there's a fixed-income strategy that can work for you. It’s particularly powerful if you have a low tolerance for risk and want a more stable portfolio. Here are just some examples of how different types of investors might use it.

(Check out our Guide to Low-Risk Investing for more practical strategies you can use!)

Keep in mind, these are only simple examples, and should serve more as guidelines. Tailor them to your financial goals and risk tolerance. And it isn't set in stone – as market conditions change and you progress through different life stages, your needs may shift. Regardless of age, a higher allocation to a diversified portfolio of bonds can help to achieve shorter-term goals, given their lower volatility.

StashAway’s fixed-income options 

Whether you're just starting out or looking to diversify your existing portfolio, StashAway offers several ways to incorporate fixed income into your investment strategy. Let's explore our fixed-income solutions and see how they can fit your needs.

General Investing 

Our General Investing portfolios offer varying levels of fixed-income exposure based on your selected risk level. These portfolios combine bonds with small allocations to equities and gold, providing additional diversification and potential for capital appreciation. For those seeking significant bond exposure, consider our lower-risk options. Our ERAA® investing framework adjusts allocations for you based on broader economic conditions, optimising for risk-adjusted returns.

Ideal for: Investors looking for a balanced approach that combines income generation with added growth potential, or those who prefer a hands-off investing approach.

Note: All figures are accurate as of 30 June 2024. Returns are in SGD terms. Performance figures are gross of fees. Refer here for pricing. Past performance is not indicative of future returns.

Flexible Portfolios 

For investors who want more control over their fixed-income allocations, our Flexible Portfolios allow you to create custom mixes from our curated selection of ETFs. You can choose from a range of bond ETFs covering various sectors, geographies, and risk levels. Start with our Passive Income template for a pre-made bond-focused portfolio, or build your own. From there, you can adjust allocations as needed to match your specific goals.

Ideal for: Investors who want to fine-tune their fixed-income allocations, or those with specific views on certain bond sectors or geographies.

Cash management: Simple Cash and USD Cash Yield 

For shorter-term cash management needs or as a complement to your bond allocation, consider our cash management solutions. Investing in short-duration bonds and money market funds, Simple and Simple Plus offer ultra-low risk with high liquidity and no lock-in periods. Similarly, our USD Cash Yield portfolio invests in short-term US Treasuries. This option provides exposure to USD-denominated assets, adding a layer of currency diversification to your overall portfolio.

Ideal for: Investors looking to park their funds for the short to medium term, earn higher yields on their cash holdings, or diversify their currency exposure with USD Cash Yield.

Note: All figures are accurate as of 31 August 2024. Performance figures are gross of fees. Yield to maturity is a projection provided by the underlying fund manager, and not a guarantee for future returns. Past performance is not indicative of future returns.

Kickstarting your journey 

Fixed income isn't just a defensive play, it's a versatile tool that can work for almost any investor. By considering the various options available to you and leveraging the power of diversification, you can use it as a powerful tool to help achieve your financial goals – whether that's generating steady income, preserving capital, or adding stability to a broader portfolio. 

With an understanding of fixed income and a clear strategy that fits your objectives, you're well on your way to incorporating this essential asset class in your investment strategy.

(For a deeper dive, check out our CIO Insights: Bond voyage! Our no-nonsense guide to fixed income!)

Bond Market Basics 

Coupon

The fixed interest payment that a bond issuer agrees to pay to investors, typically an annual percentage of the bond's face value.

Face value

The amount the issuer promises to repay at maturity, which can differ from the bond’s market price. It’s also used as the basis for calculating coupon payments.

Maturity

The date on which the bond's principal amount is to be paid back in full.

Yield to maturity (YTM)

The total return an investor can expect from a bond held until it matures, taking into account both coupon payments and any difference between the purchase price and face value.

Yield spread

The extra yield a bond offers compared to a benchmark rate, usually government bonds. A higher spread typically means higher risk.

Risk-free rate

The theoretical rate of return of an investment with zero risk, often represented by the yield on government bonds.

Credit rating

A grade given to bonds indicating how likely the issuer is to repay the debt, assigned by independent credit rating agencies 

Duration

The weighted average time until all cash flows from the bond are received, used as a measure of how sensitive a bond's price is to changes in interest rates.

References 

1. Kolchin, K., Romulus, J., and Paluzzi, M. (2024). Capital Markets Fact Book. Securities Industry and Financial Markets Association.
2. Seydl, J., and Manoukian, J. (2024). Bonds may play a renewed role in portfolios – are you ready?. J.P. Morgan Private Bank.
3. Bonds 103: Comparing Active and Passive Bond Investing Strategies. Pacific Investment Management Company.