I’ll be spending this holiday weekend with family, enjoying the last days of summer outdoors and preparing a meal or two on the grill. What do Labor Day grilling festivities and investing have in common? Plenty. Preparing the perfect meal requires an optimal balance of nutrients, just like building a portfolio requires the right savory combination of investments. Here’s how I would prepare a fixed income mixed grill.
Chicken as Treasuries
The most basic protein, chicken, is a fixture of any barbecue menu. The same can be said for Treasuries in a bond portfolio. Treasury securities, in a variety of maturities, provide more safety than any other investments as they are backed by the full faith and trust of the U.S. government, do not have a call provision, and provide a dependable income stream. They are also the ultimate diversifier for equities and other tasty higher-risk dessert items.
Investment Grade Steak
Just like a prime, choice, or select cut of beef, there are investment grade bonds that are rated according to credit quality. Investment grade describes bonds that are “AAA” or “AA” (high credit quality) and “A” to “BBB” (medium credit quality). As with those who love a good steak, investment grade bonds suit those who seek high quality in exchange for less risk. It may not be as lean as chicken, but it may provide a little more flavor in the form of extra yield.
High Yield Ribs
The decadent offering of barbecued ribs at a weekend party is similar to that of high yield fixed income investments. By taking on greater risk of spilling sauce on your shirt you have the experience of a true summertime staple, and with high yield fixed income investments you are positioned for potentially higher income. Just like the ribs, you don’t want to overdo it too much on high yield; put a sensible amount on your plate to get a taste of the flavor and little extra yield potential, but not so much that it leaves you feeling queasy from too much volatility.
Emerging Market Spicy Kebabs
For those who want a little more adventure on their menu, there’s always the option of adding some unique flavors like spicy kebabs. This is the equivalent of adding some emerging markets fixed income to your bond portfolio. You may run the risk of a little heartburn, with occasional volatility and currency risk, but no cookout is truly complete without a little spice thrown into the mix. It helps you balance out the blandness of some of the healthier options, and gives the overall meal a nice flavor kick. And here, flavor means yield potential.
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Barbecues, Beaches and Bonds: A Labor Day Story