How can a retiree invest money safely without encountering nasty surprises?
How can a pensioner, who perhaps does not earn much, have the security that when his money is invested, it will not all go up in smoke?
There are pensioners who save and there are pensioners who already have excellent pensions, but today we want to dedicate this article to regular pensioners, who have a decent pension because they have worked their whole lives or already have set some savings aside.
An investment for a pensioner can be towards their nephew, that is, investing money so that the child, who tomorrow becomes a man, will have small savings with which to go to university or maybe open a small individual business. But there are some other options too: fixed-income investments.
What are the most important benefits of fixed-income investments?
- Low Risk: Several fixed-income stocks, such as government bonds or CDs, are a minimal risk.
- Tax Exemptions: One of the best benefits is that you don’t need to worry about an increase in taxes, as most of the fixed-income investments are tax-exempt.
- A Stable Fixed Income: This is another great advantage. If you have a fixed income, you don’t need to withdraw from your capital base funds when you need money.
- Protection from Market Instability: Even if the economic situation of the whole country is in trouble, you don’t have to worry, because a fixed-income investment provides you protection against market crashes.
Fixed Income Funds
- Government and Agency Bonds: Buying these kinds of bonds can be very beneficial if you buy them from wealthy countries, as you will face high risk. On the other hand, buying developing countries’ bonds means taking a significant risk. (1)
- Treasury Bonds: It’s true that if you take low risk, your reward will be small too, but sometimes, it can give you a stable income. For example, you might wish to consider the so-called treasury bonds that the U.S. Government sells. (2)
- Mortgage-backed securities: Do you want to get a higher return? You can consider a fixed income investment that banks offer. Banks sell mortgages on the open market. (3)
- Preferred Stock: Another good option you could consider are preferred stock notes. Some organizations deal with this kind of investment to raise funds. You can transform them into common stock after a certain period. (4)
- Corporate Bonds: Businesses oftentimes arise corporate bonds that provide high returns in case you consider raising funds, though corporate bonds can involve uncertainty as well.
- Municipal Bonds: In addition to federal bonds, you can also find local municipal bonds. The good thing is that this kind of investment is low-risk. In addition, they are tax exempt. (5)
- Certificates of Deposit (CD): If you are looking for the most convenient fixed-income investment, a Certificate of Deposit can work for you. It is also a low-risk investment, and consequently, the returns are also small.
Which is better, government or corporate issues?
All financial market experts consider bonds to be a fundamental component in the asset allocation of the portfolio. But why should they be included, when they have lower than stock returns? What is the right percentage of the bond component? Which is better, government or corporate issues? Single bonds or bond funds? And how to choose between active and passive funds?
Before answering these questions, it is important to make a short clarification on some classic misunderstandings. The first is related to the price / performance ratio. As bond valuations rise, their yield falls (and vice versa). This may seem counterintuitive, but the reason lies in the fact that an investor, who wants to minimize the risk of not recovering the initial capital, will be willing to accept lower returns, when the probability that the issuer is unable to repay the loan is high then the investor will be willing to buy it, as long as he pays a lower price and receives a more generous yield.
The second is related to the business cycle. In fact, unlike for equities, the price of bonds generally goes against the trend of the economy. If the GDP of a country is in contraction, for example, the trend of its stock market will be negative, while the price of bonds will tend to rise. This is because when uncertainty rises on the stock markets, the demand for less volatile assets, such as low-risk bonds, increases, as does their price. The counter-cyclicality of this asset is one of the reasons why it is better to include it in one’s portfolio, as this way, we increase the degree of diversification of our investments and limit the ups and downs in their performance. Another reason lies in the fixed income component, represented by the interest offered by the bond, which allows offsetting any capital losses in the event of a price contraction.
- TreasuryDirect: Treasury Bonds
- The Balance: Mortgage-backed securities, Their Types, and How They Work
- Dividend: Preferred Stocks
- Money Crashers: What Are Bonds – Basics of Investing in Corporate vs. Municipal Bonds
- Nerdwallet: Certificate of Deposit: What Is a CD?