Income Investment Strategy

Income Investment Strategy

Income Investment Strategy

Income investment strategy identifies sources of immediate income whether through income stocks or bonds. There are four most commonly used fixed income investment strategies. The intentions of these examples are not to be an all-encompassing list of methods of investing. The examples used throughout are merely for illustrative purposes.

The fixed-income investment strategy includes a number of types of securities, with a variety of interest or coupon rates and credit ratings. Matching your investment objectives with the right securities is crucial to the success of your income investment strategy. In general, by diversifying your fixed-income holdings, you will achieve a better balance between risks and rewards than you would have if you concentrated your investments in a single sector or security.

The ladder strategy of income investment strategy is a conservative strategy that works well for investors who want to protect against unexpected movement in interest rates. It involves dividing your money among bonds that mature at different intervals. For example, initially you create a ladder by buying bonds with stepped maturities --one-, three- and five-years. Then, as each bond matures, you replace it with another one having the longest maturity in the ladder; in this instance, it is five years. Laddering maximizes returns and helps reduce downside risk.

The barbell strategy of income investment strategy involves buying a mix of short- and long-term bonds so that the portfolio has the same price sensitivity to interest-rate changes as an intermediate-term security. The barbell strategy of income investment strategy is generally preferred when the yield curve is expected to flatten.

Working with a single maturity is at the heart of the bullet strategy. Generally, it is used for one of two reasons. First, it is used to position a portfolio for an anticipated change in interest rates. Of the strategies, bullet strategies generally outperform barbells of similar duration when the yield curve steepens. Investors who expect the yield curve to flatten would typically shift from a bullet structure to a barbell structure.

Finally, to focus cash flows to meet expected future expenditures such as paying college expenses or buying a business. Zero-coupon bonds could be appropriate in these situations because they eliminate reinvestment risk and provide a known amount of cash at maturity. The income investment strategy that seems to be the best is the bullet strategy.

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