My last two blogs, any many before, have made reference to thoughts from Dimensional and Vanguard representatives. Today, in the interest of balance, I want to provide thoughts from a more active style approach to investing in fixed interest put together by AMP Capital.
The following link is to an article published by Professional Planner which discusses the topic of investing in fixed interest.
Special Report - Fixed Interest
The article is useful because it simply explains the basics when considering fixed interest alternatives, and in particular 2 major risks - credit default & liquidity risks:
"Thee former is the risk that the bond issuer defaults on its repayments; the latter is the risk that you can't buy or sell the volume of bonds you need to, at the price you need to."
A major part of the liquidity risk is the risk that interest rates are higher in the economy than when the initial bond was issued and therefore you are unlikely to be able to "get back" what you paid for the bond should you need the money before the bond matures.
This firm's approach is to be very targeted in what style of fixed interest clients have in their portfolio, in particular focussing on high quality offerings (rated AA or AAA) and keeping time to maturity of the underlying bonds less than 5 years which keeps a lid on liquidity risk including the impact of interest rate rises and inflation increases.
Our objective is for this investment to provide a few percentage points better return than cash over the long term.
How do we do this?
A good investment to consider is Dimensional's Five Year Diversified Fixed interest Trust.
We consider it probably the best put together fund by Dimensional as it strategically targets the sweet spot in the yield curve for fixed interest investments within the 5 years to maturity window. Returns from this trust continue to show it is meeting its target:
1 month - 1.05%
3 months - 3.31%
6 months - 4.51%
1 year - 8.51%
3 years - 6.78%
5 years - 6.19%
For more information please take a look at the Product Fact Sheet on Dimensional's website. As always, before investing in any investment it is important to consider your own individual needs and circumstances.
In concluding, as reported in AMP Capital's article, the key with fixed interest is to have broad diversification and be careful with credit and liquidity risk.