Fixed income investing — When you have a medium-term time horizon

Let’s consider some common situations where you’re investing for the medium term, which we’ll call the next 3 to 10 years. Then we’ll look at the fixed income investments that might be suitable for money that you won’t need to access until that time.

First, think of any larger expense where you can foresee that the event will likely take place in the next 3-10 years. Examples are a home down payment, college education, a wedding or imminent retirement. You may be planning to purchase a new vehicle, travel extensively or undertake a larger home maintenance project.

On the home and career front, you might be looking to pursue additional education, change careers or start a family. Any of these situations could involve forgoing income or taking a lower salary for some time and perhaps depending on invested money. Plans to purchase a new vehicle or undertake larger home maintenance projects are examples of infrequent purchases that may take some advance planning to afford. 

Also remember that long-term financial goals become medium- and then short-term goals as you near the spending date. 

Medium-term investment strategies tend to balance higher- and lower-risk assets, so a mix of stocks and bonds could be a good way to protect your wealth without losing value to inflation.

For fixed-income selections, since this time horizon spans a number of years, you may want to consider more than one type of fixed-income investment and different maturities. You may also need to make some assumptions about the direction of interest rates over the next few years. This is always difficult, even for financial professionals. But any assumptions you make aren’t carved in stone. You can adapt your strategy as various instruments mature and need to be reinvested, as long as your investments are organized so different instruments mature at different times.

With this time horizon, you’re likely to consider a mix of shorter-term instruments, such as high-interest savings accounts and money market ETFs, and slightly longer- to much longer-term products such as GICs and short- and medium-term bond funds or ETFs. The shorter-term products can be useful to supplement or back up an emergency fund. They can also be a vehicle to accumulate money to meet the minimum amounts required for some GICs and funds. The longer-term products can potentially provide a higher return while preserving your capital.

Predicting interest rate movements accurately is challenging. Diversification and staying informed about market conditions are key strategies to manage interest rate risk when choosing medium-term fixed-income investments.

Here are 7 strategies to consider: 

1. Consider a barbell or laddering strategy

Implement a barbell or laddering strategy by investing in a mix of short-term and longer-term bonds or bond funds. Shorter-term bonds help manage immediate liquidity needs, while longer-term bonds typically offer higher yields for longer periods but might be more price sensitive to interest rate changes. 

2. Floating-rate bonds or funds

Consider investing in floating-rate bonds or funds that have variable interest rates tied to key benchmark rates. These investments tend to be less affected by interest rate changes, as their coupon rates adjust with prevailing rates. 

3. Evaluate duration sensitivity

Duration measures a bond or bond fund’s sensitivity to interest rate changes. Bonds or bond funds with longer durations tend to be more sensitive to interest rate movements. Consider choosing bonds with shorter durations within the medium-term range of 3 to 10 years to lower interest rate risk. 

4. Interest rate-hedged funds

Explore interest rate-hedged bond funds or ETFs that use derivatives or strategies to offset interest rate risk. These funds attempt to protect against rising interest rates by taking short positions in certain fixed-income futures or using interest rate swaps. 

5. Stay informed and flexible

Stay updated on economic indicators, central bank policies, and market trends that could signal changes in interest rates. Be prepared to adjust your fixed income holdings accordingly based on changing rate expectations. 

6. Diversification

Diversify your fixed-income investments across different types of bonds, sectors and maturities. A diversified portfolio can help mitigate the impact of interest rate changes on the overall portfolio. 

7. Monitor and rebalance

Regularly review and rebalance your fixed-income portfolio to ensure it stays aligned with your risk tolerance and investment objectives. Rebalancing may involve adjusting the mix of bonds or shifting to shorter durations if needed. 

You can access research and detailed information on the investment choices mentioned in this article in Quotes and Research, after signing on to your Investor’s Edge account.