By Gaby Rosenberg
Sharp drops in global sharemarkets are a stinging reminder that long-term gains from shares are not linear. Sometimes share prices fall as quickly as they rise, and every so often – like the ASX’s 4 per cent plunge on Monday – we get a painful but important reminder of this reality.
The recent drops probably rattled some investors who had enjoyed the market gains of recent years, especially those impressive jumps in the share prices of companies in the artificial intelligence space.
Fixed income isn’t just a hedge against sharemarket volatility. It’s an asset class that aims to provide predictable cashflow for those seeking it.Credit: Fiona Bianchinotti
Every sharemarket correction teaches us that it often pays to diversify your investments. By spreading your portfolio across different types of assets, you can help soften the blow when one investment’s value drops, reducing your overall risk of loss.
Not every type of investment will provide the same thrill as watching Nvidia rise by 171 per cent in 2024. But they might provide a much-needed cushion when shares fall sharply – and generate reliable income too.
Many Australians turn to cash for this kind of investment. Fixed income, however, is another option that may provide a better return than cash, typically with less risk than a sharemarket investment.
So, what is “fixed income”? It broadly refers to an investment that pays a fixed rate of interest over a set term. These payments are known in advance, and you generally get your capital back if you hold the investment until maturity.
Bonds generally rise when the price of shares fall.
Examples of fixed income securities include government bonds, treasury bonds, corporate bonds and municipal bonds. A government, for example, might use the money it raises from a bond to fund projects or to build infrastructure. A corporate bond is instead issued by a company and the money used to help fund initiatives that will grow its business.
An investor in a bond essentially lends their money to the issuer to complete these activities and receives the interest payment – or “coupon” – for doing so.
Importantly, fixed income isn’t just a hedge against sharemarket volatility. It’s an asset class that aims to provide predictable cashflow for those seeking it. This can make it a suitable long-term holding for anyone from retirees to self-managed super funds, business owners or just someone looking to “park” their cash before redeploying it.
Investments like bonds are often misunderstood or considered “old-school”. People sometimes think, for example, they’re just for the wealthy or big superannuation funds. But a broad range of managed investments now overcome traditional barriers to entry, with technology also allowing easy account establishment and flexible access to capital.
Of course, no investment is risk-free. Rising interest rates, inflation and the potential for issuers to default on payments to investors are among the biggest risks in fixed income.
But a rule of thumb that bonds, for example, rise when shares fall has proved mostly true, with only rare occasions when both fell in the same year. One example was in 2022 – when a sharp, unexpected rise in interest rates and other factors hit bonds at the same time as shares slumped in value.
It was the first time since 1977 that both shares and bonds fell in the same 12-month period. Since then, their relative performance has reverted to historical norms and there is a case to argue that bonds may be one of the best risk-adjusted investments of 2025.
Opting for an experienced fund manager with an established track record can be a good way for investors to mitigate the risks above. Things to consider when choosing a fund include whether its portfolio is spread across a broad range of securities to ensure appropriate diversification.
Its targeted return and how it aims to achieve that goal are also important questions to ask. Finally, don’t forget to look closely at its fee structure and whether it’s easy to withdraw your funds.
History shows that fixed income has a real place in a well-diversified portfolio for all kinds of investors. It is now widely available to the average Australian, with a broad range of firms opening up the asset class to people who previously struggled to tap into its benefits.
Gaby Rosenberg is co-founder of investing app Blossom.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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