Selecting fixed income

Many investors have told me they want to invest in bonds, but aren't sure how to do it, or which bonds might be best for them.

To a large extent, it depends on your goals, your risk tolerance, your timeline, and how active you want to be in managing your portfolio.

Let's start with what kind of bonds you should consider. Key questions here are: what's your primary goal, how long is your investing timeframe, and how much risk do you want to take?

If you expect to need the money within four years, or want to take the least amount of risk, your primary goal is likely to be capital preservation. Investments that can be appropriate include bank CDs or short-term bond funds.

If your investing timeline is longer, and you're willing to take more risk in order to potentially earn higher yields, you might consider longer-term Treasury bonds or investment-grade corporate or municipal bonds.

And if your primary goal is income, and you're willing to take the greatest amount of risk, think about emerging market bonds or long-term Treasuries.

Once you've decided what to invest in, the next step is how to do it.

A first step here is how much you have to invest in fixed income securities.

For example, we recommend at least $100,000 if you intend to invest in individual bonds, so you can buy enough bonds from different issuers to create an adequately diversified portfolio.

Many separately managed accounts have minimum investment levels of about $250,000

The other question is how actively you want to manage your portfolio. If you're an experienced fixed income investor and want to do it yourself, individual bonds are an option.

If you'd rather leave the management to a professional, consider mutual funds or a separately managed account.

Important Disclosures:
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

Investing involves risk, including loss of principal. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Certificates of deposit are issued by various FDIC-insured institutions, and are subject to change and system access. Unlike mutual funds, certificates of deposit offer a fixed rate of return and are FDIC-insured. There may be costs associated with early redemption and possible market value adjustment.

Tax-exempt bonds are not necessarily suitable for all investors. Information related to a security's tax-exempt status (federal and in-state) is obtained from third parties, and Schwab does not guarantee its accuracy. Tax-exempt income may be subject to the alternative minimum tax. Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.

Preferred securities are often callable, meaning the issuing company may redeem the security at a certain price after a certain date. Such call features may affect yield. Preferred securities generally have lower credit ratings and a lower claim to assets than the issuer's individual bonds. Like bonds, prices of preferred securities tend to move inversely with interest rates, so they are subject to increased loss of principal during periods of rising interest rates. Investment value will fluctuate, and preferred securities, when sold before maturity, may be worth more or less than original cost. Preferred securities are subject to various other risks including changes in interest rates and credit quality, default risks, market valuations, liquidity, prepayments, early redemption, deferral risk, corporate events, tax ramifications, and other factors.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. and Charles Schwab Bank are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products are offered by Charles Schwab & Co., Inc., Member SIPC. Deposit and lending products and services are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender.