How to cook 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, tomato, 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.

We’ve assembled these conceptual “recipes” to guide how you align the appropriate fixed income opportunity with the power of behavioral coaching. Consider them as a launching point for how you can customize fixed income holdings according to your clients’ unique objectives.

Bonds to diversify risk (Chili flavor: 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 portfolios pairs high-quality bonds with traditional equities or separately managed accounts.

Possible allocation:

Investments to consider:

• VCRB Core Bond ETF
• VGSH Short-Term Treasury ETF
• VGLT Vanguard Long-Term Treasury ETF
• BNDX Total International Bond ETF
• VGIT Intermediate-Term Treasury ETF
• VMBS Mortgage-Backed Securities ETF

Talking to clients about 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.

Bonds for total returns (Chili flavor: 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 Treasury and core bonds and lower credit quality high-yield bonds with other asset classes for diversified returns.

Possible allocation:

Investments to consider:

• VPLS Core-Plus Bond ETF
• VGSH Short-Term Treasury ETF
• VGLT Long-Term Treasury ETF
• VCIT Intermediate-Term Corporate Bond ETF
• VWEAX High-Yield Corporate Fund
• VEGBX Emerging Markets Bond
• BNDX Total International Bond ETF

Talking to clients about bonds for total returns

Explain to your clients that when portfolios are well-diversified, they are more likely to have exposure to whatever is performing well. Any impact from exposure to poorer-performing asset classes will likely be limited and offset by other assets performing well.

Bonds for income (Chili flavor: spicier)

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

Possible allocation:

Investments to consider:

• VMSAX Multi-Sector Income Bond Fund
• VCSH Short-Term Corporate Bond ETF
• VEGBX Emerging Markets Bond Fund
• VWEAX High-Yield Corporate Fund
• BND Total Bond Market ETF

 Talking to clients about 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 that the opportunity to generate more income comes with the possibility of higher variable returns.

As you talk to your clients, reassure them that the right fixed income allocations can help them meet their specific investment needs and goals. Vanguard fixed income investments can help you create portfolio stability, diversified returns, income, and more for your clients. And nothing pairs better with fixed income than a great cup of chili.

Disclosures:

All investments are subject to risk, including possible loss of principal.

For more information about Vanguard funds, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund 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.

Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

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.