Why Should Stock Investors Look Into Fixed Income

Bonds usually take a back seat in terms of popularity for investors compared to stocks. While typically regarded to be less exciting, bonds are an essential component in creating a well-diversified portfolio. Here are some of the reasons why:

1. Diversification during stock market weakness

Historically, stocks outperform bonds in the long run. However, during certain periods of economic cycles when stocks trend lower, bonds have the potential to outperform.

These typically happen during periods of stable inflation, and declining interest rates when governments try to stimulate their economies following weak growth or a recession. Holding some bonds helps smoothen bumps on your portfolio since they are commonly less risky and at times move opposite to stocks.

2. Coupons allow for investors to receive regular income

Bond coupons refer to the periodic interest payments made to bondholders, so it’s great for investors who are looking for a regular source of income through interest. With long-term bond yields [1] currently between 5%-6%, having bonds for its income payment is a really attractive option for investors to lock in returns without taking on too much risk.

[1] 10 YR Government Bond Yield is at 5.8066% as of May 12, 2023

3. Bonds may also offer some capital appreciation

Aside from coupons, bonds also have a price component which moves opposite to interest rates. When interest rates are moving higher, bond prices tend to go lower and vice versa. So when interest rates start to turnover, bond prices appreciate which means investors who are holding bonds with higher yield can potentially sell at a premium later.

Although bonds move slower compared to stocks, investing in bonds presents a compelling opportunity for individuals seeking stability, consistent income, and capital preservation. With their reliable income stream, lower volatility, and the ability to diversify one's portfolio, bonds offer a secure path to your financial goals.

Accessing bonds through Bond Funds

Bond Funds allow investors to obtain a variety of bonds in a more accessible way compared to buying individual bonds. The minimum amount to invest in Bond Funds is typically around Php 1,000 already, while individual bonds may fetch prices of at least Php 100,000 and more.

One key difference between individual bonds and bond funds is that local bond funds generally do not distribute the dividends they receive. Instead, it is automatically reinvested into the fund. However, new regulations are slowly introducing Bond Funds that aim to distribute its interest payments on a more regular basis.

To know more about Bond Funds, you can attend our free webinars (go to www.colfinancial.com for our available webinars) or check out the Funds tab in our website to access the different bond funds available on our platform.