Can Fixed Income Help a Portfolio During Volatile Times?

Last Updated on Feb 24, 2023 by

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.

Table of Contents

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 are excellent quality companies but are 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.

Author
Recent Posts

Mayank Mehraa

CFA, FRM at Craving Alpha

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 behaviour of various participants. 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. | The content in this article is purely the author’s personal opinion and is for informational and educational purposes only. It should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy / sell any security or financial products.

The views and opinions stated in the content belong to the author. Craving Alpha does not uphold nor promote any of the views / opinions. | Craving Alpha is a SEBI Registered Investment Adviser (Regn. No. INA300017038)