3 Reasons Why You Should Move into Fixed Income and Out of Excessive Equity
Reduced risk and volatility
Equity mutual funds are considered to hold a substantial level of risk as their performance depends on market conditions and other variables that tend to fluctuate. With that higher risk factor comes the potential for higher returns over the long run. This is one of the primary reasons that young investors with a relatively large investment horizon are urged to make equity mutual funds/stocks a significant portion of their portfolio. Their risk gets averaged out over a long period of time, while equity-holding investors have the opportunity to claim significant returns too. On the other hand, fixed income investors are creditors who can claim the loaned amount and the interest earned. The volatility in equity funds is why you should move out of excessive equity and into fixed income instruments at your investment stage.
Greater claim to assets
In the event of bankruptcy, equity owners have the last claim to assets if the company or issuer defaults. On the other hand, in the event of default, bondholders are given more priority than equity holders. This is therefore a relatively less riskier investment option than equity.
More stable returns
Although equity mutual funds have the potential to yield relatively higher returns as the reward for high risk, equity holders must also grapple with the possibility of losing a lot of money if they perform poorly. In the In the event of bankruptcy, equity owners have the last claim to assets if the company or issuer defaults. On the other hand, in the event of default, bondholders are given more priority than equity holders. This is therefore a relatively less riskier investment option than equity.
In case of fixed income instruments, the returns are comparatively lower, but they are also more stable. In this phase of your investing journey, it may not make sense for you to take the risk of too much equities when there is considerably less time to recover losses.
As always, consult your financial advisor before making any major decisions. But as a rule of thumb, it would be beneficial for you to move into fixed income investments and away from too much equity at this point in your life.
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