Fixed Income Investing
Our Philosophy: We do not try to time the market by predicting interest rates. We use a buy-and-hold approach to fixed income investing.
Rationale: Fixed income securities are used to provide secure, regular returns to an investor. Trying to aggressively time interest rate changes can be risky and is often a losing game.
Our Philosophy: Build a portfolio with securities maturing at different time intervals. This is known as “laddering.” We buy securities that have a life (or maturity) of anywhere from 6 months to 30 years. We usually spread the maturities out over time. If the goal for the account dictates a liquidity schedule that requires timed payouts then we select the appropriate maturities.
Rationale: In a rising interest rate environment this approach gives us the opportunity to re-invest maturing securities at the higher interest rates on a regular basis. In a falling interest rate environment this strategy locks in a portion of the portfolio (those securities maturing at later dates) at higher rates. The laddering approach also provides a degree of liquidity for the account holder – securities maturing on a regular basis in case cash is needed. And, it gives us the opportunity to select new securities on a regular basis.
Philosophy: Price appreciation is not a goal of fixed income investing – that is the goal of our stock investing style. The goal of our fixed income investing is to preserve principal, generate income and diversify the holdings in a portfolio.
Rationale: The prices of fixed income securities go up and down (depending on how interest rates are changing in the marketplace). But, because we hold fixed income securities for their stated life, this fluctuation in price is not as important as the income the securities generate for your account. Keep in mind that while the price of a security will fluctuate, we will likely hold it in an account (in almost all cases) until it matures at which time you will receive the entire face value of the security. The face value is stated when the security is issued and stays the same over the life of the security. (There is one exception to this rule: Treasury Inflation Protected Securities or T.I.P.S. – in this case the face value increases over time with inflation.)
Philosophy: Sell a fixed income security if it has become an especially bad credit risk.
Rationale: The credit-rating of fixed income securities may decline thus causing their values to decrease. To guard against such an occurrence we try to establish a diversified portfolio of fixed income securities. We use U.S. treasury securities as base and when we add in corporate bonds or state tax-exempt securities we tend to stick to investment grade securities, and we evaluate their fundamentals carefully before purchase.
Securities we use:
U.S. Treasury securities provide a good risk-free base for most accounts.
U.S. government agency securities are used when they are financially strong and available at historically attractive spreads over Treasuries.
CD’s (bank certificates of deposit) are used when rates are attractive.
Corporate bonds and preferred stocks often make up a portion of the fixed income portfolio. Selection criteria include the following:
The security is issued by a large company.
The company has a strong fixed charge coverage ratio.
The company has low debt ratios.
The issuing company’s business is a consistent cash-flow generator.
The security offers an attractive yield-spread above treasuries.
State tax-exempt bonds are used when consistent with the client’s goals and tax situation.
T.I.P.S Treasury Inflation Protection Securities (T.I.P.S.) are used in tax-deferred accounts as a hedge against inflation when this is deemed appropriate. T.I.P.S. behave differently than stocks, bonds and R.E.I.T.s. They are good diversifiers, a great inflation hedge and they tend to smooth out portfolio volatility. $$