The role of fixed income is not to generate large returns — it is to provide stability and peace of mind. It is the portfolio's anchor. When the stock market falls 20%, fixed income tends to remain stable or even rise, cushioning overall losses.
Its main risks:
- Interest rate risk: If rates rise after you have bought a bond, the value of that bond in the market falls — because new bonds pay more interest.
- Inflation risk: If you buy a bond at 2% per year and inflation rises to 5%, you are losing purchasing power in real terms.
- Credit risk: This is the risk that the issuer cannot pay the interest or return the capital. Bonds with a high default risk are called high-yield bonds (or 'junk bonds'), because they must offer very high interest rates to attract investors.
⚠️ Important
When it makes the most sense: When central bank interest rates are high, fixed income offers attractive returns with very little risk. When rates are near 0%, its appeal disappears.