Proceed cautiously with your fixed income investment ideas and make sure that you know the risks that accompany those investments.

Fixed income investing is an investment strategy designed to provide a steady stream of current interest income. Fixed income investment ideas and instruments can include T-bills, GICs, bonds and bond ETFs or mutual funds.

Consider the optimal equities-to-fixed income mix for your portfolio before looking for the best fixed income investment ideas

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The right equities-to-fixed-return split varies widely from one investor to another, of course. It depends on your financial circumstances and your temperament. If you’re a young investor with secure income, and you add regularly to your stock holdings, you may want to keep all your long-term savings in stocks. If you are retired or close to it, you may want to hold some fixed-income investments—but stick with Canadian T-bills with maturities of around three months, or perhaps, short-term GICs. Regardless of age, all investors should stay out of long-term bonds.

Fixed-return investments don’t offer the same growth prospects as equities, and that will likely cut your long-term returns. Note, though, that fixed income investments can act as an offset to the volatility of a stock portfolio. They can help stabilize you portfolio’s value. They serve as reserves you can use to buy more stocks when prices are down. For that matter, when stock prices are down, you can use your reserves for personal spending to avoid having to sell at a low.

Beware of the two great risks in most fixed-income investment ideas and keep more of your money working for you

We’ve often pointed out that conflicts of interest are the biggest single risk you face as an investor.

The risk is bigger when you believe fixed-income investing ideas that suggest those investments are inherently safe. This may lead you to overlook conflicts of interest, and fail to spot hidden risks and cash-draining fees. You can wind up with results that range from meagre to disastrous.

Most people who get swindled in Ponzi schemes go in thinking they have found a safe source of high-yielding fixed income. Bernie Madoff, perpetrator of the biggest Ponzi scheme in history, sucked his victims in by offering them a fixed-return opportunity that was just a little bit too good to be true. His investors lost $65 billion. That’s an extreme example, of course.

On the other hand, it’s fair to say that investments come in two basic varieties: equity and debt. The basic distinction is that the former represents ownership in an enterprise or asset, and the latter represents loans of money.

Investors like the possibility of big gains from equities, but they also like the feeling of certainty that if you lend money to creditworthy borrowers, you get it back, plus interest.

That’s why investment products tend to play up the gains and income they provide, while hiding the extra risks and fees in the fine print.

Preferred stock, the traditional “bond alternative” for beginners, is an example. A preferred share gives you a higher yield than a bond from the same company, and its steady dividend may be eligible for the dividend tax credit. But at best, preferreds provide the expected modest return, and no more.

When business slumps, companies can quit paying their preferred dividends. In addition, as with bonds, the fixed returns of preferreds leave you at the mercy of inflation.

That’s a key drawback to all true fixed-income investments. The only return they give you is their fixed interest payments or distributions. You can try to increase your income on tradable fixed-return investments like bonds, by selling at price peaks and buying back on a dip. However, this guarantees you’ll pay more commission, and typically will leave you with trading losses.

Of course, some fixed-return-style investment products come with a chance of higher returns. But investors pay for that possibility of higher returns by agreeing to accept higher risk and/or pay higher fees.

Use our three-part Successful Investor approach to get better long-term results

At TSI Network we feel that most fixed income investment ideas should only represent a very small part of your portfolio, if at all. If you’d like to increase your long term profits we recommend buying stocks using our three-part Successful Investor strategy:

1. Invest mainly in well-established, high-quality, dividend-paying stocks;
2. Spread your money out across most, if not all, of the five economic sectors;
3. Resist the lure of buying stocks when they are in the broker/media limelight. Market setbacks are unpredictable. When they hit, stocks that are or have recently been in the limelight can post particularly deep and staggering losses.

How much has the current low-interest-rate environment eroded your interest in fixed-income investments and increased your interest in high-yield dividend stocks?