Many investors look for a fixed rate of return. A fixed rate of return helps you know what to expect in terms of income, and provides you with a reliable income stream.
Investments with a fixed rate of return can be useful in your portfolio, but there are some things you need to be aware of before you tie up too much of your money in these types of investments.
What Products Offer a Fixed Rate of Return?
There are a number of popular fixed rate bonds that you can invest in to get regular income. Here are some of the products that you can consider if you want a fixed rate of return:
- Bonds: There are a number of bonds that provide you with the ability to earn a fixed rate of return. When you get a bond, you are basically providing a loan to an entity. You are promised a specific interest rate in return for letting the company or government use your money. You can get a better interest rate on certain bonds, including foreign emerging market bonds. However, even though you have a guaranteed rate of return, there is still the possibility of default, since this is a loan.
- CDs: Certificates of deposit provide you with safer fixed returns. You put cash in a bank or credit union that is insured by the FDIC, so you know that your money is safe. The longer you are willing to put your money in for the CD, the better your return. You can usually get pretty good yields if you shop around and consider a variety of banks.
- Annuities: You might need to be especially careful when you invest in an annuity. You might see a fixed rate of return, but there are other problems you might see. Passing the annuity on to a beneficiary can be difficult, and you might face tax issues, as well as high fees.
Realities of Fixed Rate Assets
If you are looking for a fixed rate of return, it’s important to realize that there are some unpleasant realities. First of all, any time you are guaranteed a return, you will see a lower yield. It’s the price you pay for a certain level of safety and security. You probably won’t be able to build a huge nest egg just using assets with fixed rates of return.
Additionally, many fixed rate assets have less flexibility. When you invest in bonds or CDs, you can face penalties when you try to remove the money early. With annuities, the process for withdrawing money ahead of time is even more complex — and can be even more expensive. You have to be prepared to lock your money away for a set period of time when you get a fixed rate of return.
Adding these types of assets to your portfolio can make sense if you are looking for a little safety. They can improve your chances of receiving predictable income. However, you do need to be aware of some of the challenges; don’t tie up all your assets in these investments.