The Pros and Cons of Equity vs Fixed-Rate Investments

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The Pros and Cons of Equity vs Fixed-Rate Investments

April 26
09:27 2022
The Pros and Cons of Equity vs Fixed-Rate Investments

The annual rate of inflation has increased to 8.5% in March 2022. Beating the market forecast of 8.4%, this is the highest rate since 1982. This statistic was derived from the Consumer Price Index (CPI), which tracks the price change of goods and services over time. The largest contributor to this inflation rate spike is an increase of 32% in energy, with gasoline up 48% and fuel oil skyrocketing to 70.1%. This high increase in energy is largely due to Russia’s invasion of Ukraine which added instability to the futures market. There is also a price increase in food that has now reached 8.8%. Many analysts expected March to be the peak of inflation, but the war in Ukraine, global supply chain disruptions, and increased consumer demands increased the Producers Price Index (which is what manufacturers pay to produce their products) by 11.2%. The biggest problem with inflation is that it affects the number of goods or services that can be purchased with a unit of currency (also known as purchasing power). A common way to combat inflation is to increase wealth through investing instead of letting cash deteriorate. The most popular ways of investing are through equity (stocks) or fixed-rate instruments (dividends or alternative investments).

Per: https://www.nytimes.com/live/2022/04/12/business/cpi-inflation-report

Investing in equity markets requires the purchase and sales of stocks on an exchange. The New York Stock Exchange (NYSE) is the largest stock exchange in the U.S. By purchasing equities, investors obtain partial ownership of the issuing companies. A return on the purchase can be seen through capital appreciation or dividends paid on the stock. Equity markets typically offer higher returns but carry additional risk than fixed-income markets. Equity has systematic risk that is also known as market risk and refers to the market volatility in different economic conditions. The other type of risk is unsystematic risk and refers to the risk that is dependent on the operations of individual companies. Systematic risk cannot be avoided but unsystematic risk cannot be predicted and can be offset through diversification (e.g., investing in securities from many different industries). 

A fixed-income investment promises fixed amounts of cash flows at fixed dates and the repayment of principal at maturity. These are commonly referred to as debt instruments or the bond market. One type of fixed-income investment consists of securities issued by the federal government, corporate bonds, municipal bonds, and mortgage debt instruments. These investments receive a smaller return but are considered less risky and volatile than equity investments. A problem that arises with this type of investment is default risk, which is the chance that the borrower will not be able to make payments on the debt obligation to the lender. The other type of fixed income investment instruments are alternative investments like REITs, private credit, oil & gas and many more. These types of investments typically have a higher fixed rate of return.

Both equity and fixed income products are great financial instruments to help investors achieve their goals. A combination of both asset classes can achieve a balanced risk and return combination for a portfolio. Equity and fixed income returns are uncorrelated with each other. This allows fixed-income investments to add predictability and safety to a portfolio. On the other side, equity investments have the potential for higher payoffs. An investor should focus on maintaining a balanced portfolio by allocating a combination of equity and fixed income products based on their risk tolerance. 

Per: https://www.alliancebernstein.com/corporate/en/insights/investment-insights/can-a-high-yield-allocation-still-offset-equity-volatility.html

To learn more about alternative investing or the Family Business Fund, please contact Douglas Muir at [email protected] or (888) 884-6442.

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