The flavors of fixed income

Match client needs with the right fixed income strategy.
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Cooking up the right fixed income recipe for different client needs

Getting the right fixed income allocations in an investment portfolio is a bit like cooking a great chili. Both bring together a diverse selection of ingredients. For chili, that’s veggies, tomatoes, beans, and seasoning, while the investment portfolio selects from a variety of asset classes to create the right mix.

However, a great chili or a successful portfolio depends entirely on the audience. While some people like a five-alarm chili, others prefer a milder dish. In a similar but more complex way, your clients have their own investment needs, risk tolerances, and financial goals, making it your job to find the right fixed income allocation for each client’s situation.

Vanguard makes it easy by providing four fixed income “recipes” in the form of model portfolios. Each model focuses on a different client need and is meant to guide you in how you align the right fixed income opportunity with the right client. Consider them a launching point for how to customize fixed income holdings according to your clients’ unique objectives.

 

This graphic illustrates the four different categories of fixed income on a risk/return spectrum starting with Capital preservation, diversify risk, total return followed by income.

Bonds for capital preservation

The flavor of fixed income: Extra mild

This fixed income profile is for clients who prioritize safeguarding their capital above all else. They seek protection from market fluctuations in order to preserve their principal. This portfolio combines short-term credit, intermediate and short-term Treasuries, and cash reserves to help minimize volatility while aiming to provide modest returns over cash.

 

Possible allocation:

This graphic shows the possible sector allocations for the capital preservation profile. These include cash, short-term Treasuries, intermediate-term Treasuries and Short-term credit.

 

Talking to clients about using bonds to preserve capital

Explain to your clients that the goal of this approach is to maintain their sense of financial security. Emphasize that, while higher-quality, shorter-term fixed income instruments may generate lower returns, they can help deliver peace of mind. These instruments minimize portfolio volatility and ensure that capital remains available as needed.

Simplify by using our model: Vanguard Fixed Income Capital Preservation Model.

View the model

Bonds to diversify risk

The flavor of fixed income: Mild

This fixed income profile can be for clients who are concerned about volatility, don’t want to risk spending down their principal, and are comfortable with lower potential returns from fixed income in exchange for a hedge against equity market downturns. This portfolio pairs high-quality bonds with traditional equities or separately managed accounts.

 

Possible allocation:

This graphic shows the possible sector allocations for the diversify risk profile. These include short-term Treasuries, intermediate-term Treasuries, long-term Treasuries, mortgaged-backed securities, investment-grade corporate credit and international bonds.

 

Talking to clients about using bonds to diversify risk

Using this fixed income concept, you can address client anxieties by emphasizing that high-quality fixed income investments, such as Treasuries, core bond, and mortgage-backed securities, often move in the opposite direction of equities when the stock market sells off.

Reassure clients that their goals can still be within reach because they prepared this way for equity market downturn scenarios.

Simplify by using our model: Vanguard Fixed Income Risk Diversification Model.

View the model

Bonds for total return

The flavor of fixed income: Medium

This investment concept can be for clients who are comfortable with higher volatility if it means an opportunity for higher returns. It combines higher quality core bonds, and lower credit quality high-yield bonds with other asset classes for diversified returns.

 

Possible allocation:

This graphic shows the possible sector allocations for the bonds for total return profile. These include short-term Treasuries, long-term Treasuries, mortgage-backed securities, investment-grade corporate credit, international bonds, high-yield and emerging market bonds.

 

Talking to clients about using bonds for total returns

Explain to your clients that the goal of this portfolio is to outperform the broad fixed income market. It is designed as a core fixed income holding for clients willing to accept a higher level of active risk.

Simplify by using our model: Vanguard Fixed Income Total Return and Active Total Return Models

View the models

Bonds for income

The flavor of fixed income: Spicier

This investment concept can be for clients who need income to meet their spending needs. To accomplish this, allocate to bond funds with greater credit exposure, which can include diversified active bond funds, emerging markets, high-yield, and active multi-sector, among others. This model portfolio is coming soon.

 

 

Possible allocation:

This graphic shows the possible sector allocations for the bonds for income profile. These include short-term Treasuries, long-term Treasuries, intermediate-term corporate credit, short-term corporate credit, high-yield and emerging market bonds.

 

Talking to clients about using bonds for income

Clients should be reassured that having a steady income stream in the portfolio can relieve the pressure of having to sell equities to fund spending. It’s important to set client expectations around the fact that the opportunity to generate more income comes with the possibility of higher variable returns.

Stay tuned for our income-focused fixed income model available later this year.

Have questions? Contact us.

Disclosures and footnotes

  • For more information about Vanguard funds or Vanguard ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
  • All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.
  • Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Vanguard does not, and will not, make any representations about whether a model portfolio is in the best interest of any investor, is not, and will not be, responsible for the determination of whether a model portfolio is in the best interests of any investor; and is not acting as an investment advisor to any investor. It is the investment advisor's responsibility to determine the appropriateness of the model portfolios, or any of the securities included therein, for any client.
  • The Vanguard model portfolios are provided for illustrative and educational purposes only. The Vanguard model portfolios do not constitute research, are not personalized investment advice or an investment recommendation from Vanguard to any client of a third party financial professional and are intended for use only by a third party financial professional, with other information, as a resource to help build a portfolio or as an input in the development of investment advice for its own clients. Such financial professionals are responsible for making their own independent judgment as to how to use the Vanguard model portfolios.