A majority of Americans have limited understanding about fixed income investing regardless of age, income, education level and other demographics, according to a research study released from BNY Mellon Investment Management.
While the study found 39% of the total of those surveyed report having some portion of their investment portfolio allocated toward fixed income assets, they remain unclear about various fixed income solutions and how bond investing works.
For example, half (50%) of those surveyed reported believing the best way to maximize the value of fixed income in one’s investment portfolio is to own individual bonds rather than purchase a mutual fund investing in bonds. Forty-four percent believe investors must hold bonds to maturity, and 43% believe fixed income returns cannot approach equity fund returns.
The study also revealed lack of knowledge about the variety of fixed income solutions available to investors. Forty-four percent of those who reported having no allocation toward fixed income gave the reason “lack of understanding of different fixed income classes.”
More than half of those surveyed reported they “do not understand at all” global bonds or corporate bonds (63% and 51%, respectively) and more than half (54%) admitted they do not understand the meaning of high-yield bonds, aka “junk bonds.” Forty-four percent believe municipal bonds are primarily intended only for high-net-worth or ultra-high-net-worth individuals.
More than one-quarter (28%) believe fixed income investing is intended only for retirement planning, while 40% said they do not know at what point in time the average investor should consider adding fixed income to their investment portfolios.
“Fixed income provides some of the most versatile and vibrant investment options available and yet there exists around it a sense of confusion and misperception. Chief among these is that fixed income plays an important role solely in the immediate run up to retirement, or during the decumulation phase when investors start to draw money from their investment nest eggs,” says Andy Provencher, head of North American distribution, BNY Mellon Investment Management.
He adds: “Beyond its role in ‘de-risking’ portfolios in preparation for retirement, fixed income can play a crucial part in an investor’s portfolio at any age. This includes the mitigation of equity market volatility as a Millennial saves for a house deposit, or by helping investors make an impact in their local communities through investing in their state’s municipal bond issues. It’s imperative we open investors’ eyes to the true potential of fixed income and challenge their ‘fixed thinking.'”
Despite these findings, Alight Solutions has found 401(k) plan investors have embraced fixed in income in this time of stock market volatility. August was the 19th month in a row during which net 401(k) trades have flowed from equities into fixed income, according to the Alight Solutions 401(k) Index.
Although interest rate movement has made fixed income investments more “volatile” over the years, they remain a valuable investment for retirement plan participants at any stage of the career cycle. As Tracey M. Manzi, vice president, investments at Cammack Retirement, wrote in an article last year, “High-quality bonds have traditionally been considered the safe haven investment in asset allocation decisions. This remains true regardless of the level of yields or the current market environment. While, in recent years, the fixed income landscape has become considerably more challenging for managers to navigate, it does not diminish the role bonds should play in any asset allocation model.”
She explains that bonds are meant to serve four primary functions in a diversified portfolio: capital preservation, income, inflation protection and diversification from equities. “While the optimal allocation to bonds and within the sub-asset classes can vary greatly depending on an investor’s risk tolerance and time horizon, bonds will continue to perform these critical functions in any type of market environment,” she says.
Still, the “new normal” of lower interest rates may mean investors have to take more risk. And, with increasing longevity, even those who are close to or in retirement may need to reconsider how much to allocate to fixed income investments. Retirees are no longer considered short-term investors.
“As the Baby Boomer generation enters its retirement years—and these investors shift from the accumulation to decumulation phase of their lives—a meaningful understanding of fixed income solutions will of course be vital,” says Provencher.
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