The Role of Bonds: Diversifying with Fixed Income Assets

25 August 2023

Diversification is a critical strategy in mitigating risk and ensuring stable returns in the tumultuous landscape of investments. An essential tool for achieving this diversification is fixed income assets, especially bonds. By expanding your portfolio beyond just stocks, you can establish a robust financial foundation capable of weathering market uncertainties.

For investing in Singapore, the role of bonds as income generating assets becomes more prominent due to their stability and regularity. But what exactly are bonds, and how do they function?

Understanding bonds and their role in your portfolio

Bonds are essentially loans you provide to an organisation—be it a government entity or a corporation—for a defined period. In return, these organisations promise to pay you regular interest payouts and return the principal amount once the bond matures. This characteristic makes bonds one of the most reliable sources of income, even in an uncertain market.

Now, the keyword here is 'reliability.' Investing in bonds may not get your adrenaline pumping like trading in volatile stocks or cryptocurrencies, but the steady, consistent income it provides can help build a good investment portfolio. Moreover, when the equity market hits a rough patch, bonds often remain unaffected or even increase in value – providing a cushion to your overall portfolio.

The benefits of diversifying your investment portfolio with bonds

As you assemble an investment portfolio, your aim should not only be to maximise returns but to also balance the risk-return trade-off. Here are some advantages of integrating bonds into your investment portfolio:

1. Reliable income

Bonds provide regular interest payments, creating a steady stream of income. This consistency is invaluable, especially for those who want to supplement their income, whether to accelerate their journey towards financial independence, plan for early retirement or generate an additional income source. For these individuals, the recurring interest from bonds can form a critical part of their financial blueprint.

2. Lower risk

Bonds have a reputation as a 'safe haven' asset class, generally perceived to carry lower risk. Their predictable cash flows and the issuer's obligation to repay the principal at maturity help cushion the overall risk profile of your investment portfolio. Consequently, adding bonds to an equity-focused portfolio can create a risk-diversified asset mix, bringing more peace of mind to investors.

3. Enhanced portfolio stability

The financial market, by its nature, is replete with ups and downs. While equities have the potential for high returns, they are also susceptible to significant market fluctuations. Here, bonds can provide a stabilising influence, helping to smooth out the equity market's roller-coaster ride. Their relative price stability and regular income payments serve as a counterbalance, making your portfolio more resilient against market volatility in the long run.

4. Capital preservation

Investing in bonds comes with a promise: when a bond reaches its maturity date, the issuer is obliged to repay the principal amount you initially invested. This feature of capital preservation makes bonds particularly attractive for those prioritising security over high returns. By integrating bonds into your portfolio, you're not just investing but also lowering the overall risk in your portfolio.

Start investing in bonds with StashAway

When it comes to flexible investing, an investment platform can be a vital ally. In Singapore, investment platforms like StashAway offer diversified portfolios that are optimised for your risk tolerance and financial goals. With StashAway, you're free to choose from two passive income portfolios: the 'Stable Income' portfolio, designed for lower risk tolerance with a payout target of 4-5% p.a., and the 'High Income' portfolio, intended for higher risk tolerance with a payout target of 5-6% p.a. These portfolios largely rely on bonds, encompassing both corporate and government bonds, of both short and long durations, sourced globally.

Experience the freedom of investing without minimum constraints, reap regular interest payouts, and shape your portfolio from an assortment of over 50 asset classes. This fosters flexible investing personalised to your financial aspirations.

With savvy investment platforms like StashAway, generating passive income in Singapore becomes within reach. Tap into the advantages of income generating assets to navigate your wealth towards gradual growth.

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