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As kids, we dream about eating an ice-cream-only diet forever. But as we mature, we understand the importance of a balanced diet. Flavor matters, but we learn to focus on the benefits different foods can provide to help enhance our overall health.

This benefit-focused mindset is also helpful for investors: Is my portfolio using the right ingredients to support my financial health? 

If we think of a portfolio as a balanced meal, stocks generally act as the protein helping to grow your portfolio. But what about fats, which can help regulate your body, and carbohydrates, which provide energy? That’s where fixed income can fill many important roles.

 

What Sets Fixed Income Types Apart
While fixed income shares some basic traits, it’s an investment type with many different flavors from which to choose. With so much variety, specific characteristics and roles can vary widely. 

As we see it, there are two broad ways fixed income can serve investors. These include potentially reducing portfolio volatility (think fats) or generating income (think carbohydrates).

 

Potential Volatility Reducers (aka Fats)

Though dietary fats have gotten a bad rap, they’re necessary to support cell growth, help protect your organs, regulate your body temperature, and even absorb some nutrients.

In investing, you may need a cushion from equity-driven volatility. That’s a role that can be filled by high-quality bonds such as US Treasuries, municipal bonds, mortgage-backed securities, and global-government bonds. 

These types of fixed income tend to behave differently than stocks, which is why they can potentially offset volatility and add diversification to your portfolio. However, these types of fixed income offer low yields. 

 

Income Generators (aka Carbohydrates)

When your body needs energy, it looks to carbohydrates. In your portfolio, rather than where you source your energy, think about where you source your income. This is where corporate bonds, high-yield bonds, and emerging-market debt can help.  

These bonds carry more risk because they tend to behave more like equities than say, a US Treasury bond. To compensate for this added risk, these types of fixed income tend to provide higher yields, which can make them a vital source of income. 

 

FIGURE 1

Understanding the Roles of Fixed Income
How Different Types of Fixed Income Typically Behave (2005–2020)

FIGURE 1 compares how different types of fixed income have historically behaved in relation to equities (correlation) and their expected return (yield). Fixed income that’s less correlated to equities can offer diversification and help reduce overall portfolio volatility (bottom left circle), while fixed income that’s more correlated to equities generally offers higher returns and can be a source of income (upper right circle).

Past performance does not guarantee future results. Investors cannot directly invest in an index. As of 12/31/20. Correlation is a statistical measure of how two investments move in relation to each other; a correlation of 1.0 indicates the investments have historically moved in the same direction; a correlation of -1.0 means the investments have historically moved in opposite directions; and a correlation of 0 indicates no historical relationship in the movement of the investments) to equities. Yield to maturity (i.e., the expected total return if a bond is held until maturity) for all indices except Municipals, which is Yield to Worst (i.e., the lowest possible yield on a bond without it defaulting). For illustrative purposes only. Please see representative index definitions on page 3. Diversification does not ensure a profit or protect against a loss in a declining market. Data Sources: Bloomberg, S&P Dow Jones, and Morningstar, 2/21.

 

Don’t Settle for Something Bland

Though they may have different purposes, there is some common ground between all types of fixed income, including risks. 

For example, an issuer can default and fail to repay its debt to borrowers, and prices can also fluctuate with the market: when interest rates rise, bond prices typically fall. That’s why it’s important to manage risk in your bond portfolio just as carefully as you do in your equity portfolio. 

To sum it up, proper nutrition can be a complex equation, but your portfolio’s recipe doesn’t have to be. Talk to your financial professional today making sure you’re invested in the right types of fixed income to help you reach your goals.

 

Talk to your financial professional about the roles fixed income should play in your portfolio.

 

US Treasuries are represented by the Bloomberg US Aggregate Bond Index, which is composed of securities from the Bloomberg Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index. Cash is represented by the Bloomberg US Treasury Bill 1-3 Month Index, which is designed to measure the performance of public obligations of the US Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months. Municipals are represented by the Bloomberg Municipal Bond Index, an unmanaged index that is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. Mortgage-Backed Securities are represented by the Bloomberg US MBS Index, which tracks fixed-rate agency mortgage-backed passthrough securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). investment-grade corporate fixed-rate debt issues with maturities of one year or more. Investment-Grade Corporate is represented by the Bloomberg US Corporate Index, which measures the investment grade, fixed-rate, taxable corporate bond market. Emerging Market Debt is represented by the Bloomberg Emerging Markets Aggregate Bond Index, a hard-currency emerging-markets debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.  Global High-Yield Bonds are represented by the Bloomberg Global High Yield Index, a multi-currency measure of the global high yield debt market. 

“Bloomberg®” and any Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Hartford Funds. Bloomberg is not affiliated with Hartford Funds, and Bloomberg does not approve, endorse, review, or recommend any Hartford Funds product. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Hartford Fund products.     

Important Risks:  Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, event and interest-rate risk. As interest rates rise, bond prices generally fall. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets or if the Fund focuses in a particular geographic region or country. • Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Although municipal securities that are exempt from federal income taxes, investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • Mortgage-related and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk. 

This information should not be considered investment advice or a ecommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person. The information is not intended to be either tax or legal advice. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material is provided for educational purposes only.

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