Can Fixed Income Help a Portfolio During Volatile Times?
Volatility in the stock market can be a major cause of concern for investors. During times of market uncertainty, it’s natural to want to protect your portfolio from potential losses. Fixed-income investments can help you do just that.
Fixed-income investments: A stable option
Fixed-income investments, such as bonds and Treasury notes, are considered to be a more stable and predictable alternative to stocks. Unlike stocks, which can fluctuate wildly in response to market changes, fixed-income investments provide a fixed income stream, making them less susceptible to market turbulence. This stability can provide investors with peace of mind during volatile times.
Data supports the benefits of including fixed-income investments in a portfolio. A study by Vanguard found that a 60/40 portfolio split between stocks and bonds had a standard deviation of 7.5%. In contrast, a portfolio made up entirely of stocks had a standard deviation of 15.5%. This shows that adding fixed-income investments to a portfolio can significantly reduce its overall volatility.
In addition to reducing volatility, fixed-income investments can also provide a reliable source of income. When you invest in a bond, you essentially lend money to a borrower (such as a corporation or the government) in exchange for regular interest payments. These payments can provide a stable source of income for investors, particularly during market uncertainty when stocks may not perform well.
Another advantage of fixed-income investments is that they can act as a hedge against inflation. As the cost of goods and services increases over time, the fixed payments from your bond investments can help maintain your purchasing power.
While fixed-income investments can provide stability and a source of income during volatile times, it’s important to consider the limitations of these investments. For example, corporate bonds have a limited upside as the returns are limited to coupon payments.
Recreating the fixed-income hedge without debt!
Another way to have low volatility is through a multi-asset portfolio that invests in commodities, real estate, and equities. The portfolio of our choice is- SREE (Silver, Real Estate, and Global Equities).
This portfolio not only reduces volatility by investing in Silver and Real Estate but also ensures you are invested in equities worldwide.
Debt often has a fixed cash flow during its duration. REITs, however, have the potential to grow rents that can increase the yield for an investor. Effectively providing you with an inflation-adjusted cash flow. Whereas with debt, the cash flow would be the same amount in REITs, it could potentially grow faster than inflation while protecting the stable value per share of the REITs.
To round up your exposure, the portfolio also invests in the top stocks from India and from an economy that has high growth prospects!
Currently, the portfolio is invested in the top 10 stocks from the NASDAQ, which is excellent quality companies but is available at a bargain due to the recessionary fears in the US and high-interest rates.
Small-cap stocks: A growth option
On the other hand, investing in a portfolio of small-cap stocks with no debt can offer greater potential for growth and appreciation.
Small-cap stocks, particularly those with no debt, are considered to be theoretically default-proof as they have no outstanding debt obligations. This means that the coupon payments do not limit the entire upside of the investment but instead are tied to the potential for growth and appreciation of the underlying business. This can result in greater potential for returns compared to fixed-income investments.
Additionally, small-cap stocks are considered under-researched and undervalued, which can result in greater potential for misprising and alpha generation. By investing in a diversified portfolio of small-cap stocks, investors can potentially benefit from the collective growth and appreciation of the underlying businesses. We have a portfolio offering that does exactly that- BOLD. Use Tickertape Stock Screener to filter the best small-cap stocks according to key parameters like net profit, market cap, 1-yr returns, and more.
It’s important to note that investing in small-cap stocks can also come with greater risk compared to fixed-income investments. Small-cap stocks are generally more volatile and have a higher potential for failure than larger, established companies. This means that investors should carefully consider their risk tolerance and goals before making investment decisions.
Conclusion
Both fixed-income and small-cap stocks with no debt have pros and cons. Fixed-income investments can provide stability, a source of income, and act as a hedge against inflation, while small-cap stocks can offer greater potential for growth and appreciation.
Mayank is an investor above all else who began Investing at the age of 16. Since then he has been learning from the markets and how it affects the behavior of various participants. Being a stern believer in the “Efficient Market Hypothesis”, he is always on the lookout for opportunities that have a high reward but have been ignored by the street for various reasons- which he terms “Investing in Muddy Waters” that is the investing philosophy of the “Core Portfolio”. As someone who believes in “Time in the market > Timing the Market”, he has attempted to leverage his skills in technology and finance to put together investing strategies that focus on generating alpha with low volatility.
This article was originally published on Blog by Tickertape
