Investing In Strategic Income

It's hard to imagine a reason not to increase our income. Despite what the old adage says, more money usually means fewer problems. Increasing our income and our number of income streams is the real key to long-term wealth — the reason we all invest in the first place.

This is especially necessary in times of inflation, when prices go up for just about everything, eating into our bottom line. If our income doesn’t outpace this increase, then we can be left in a very difficult position.

Add in stunted economic growth, and we end up with more problems. Costs go up, and maybe so too do wages, but the increase in income is offset by the commensurate price hikes (CNN).

You may be asking yourself if you can do anything to step up your income, and luckily, there is. Some investment strategies fall in and out of favor depending on how the overall market behaves, but having a healthy yield on your money will never go out of style.

During these times of increasing prices and sluggish GDP, you may want to become more risk averse, opting for strategies that offer not only downside protection but steady income. If you can turn in an above-average return, that's just a bonus.

And that’s the idea behind a Strategic Income approach, maximizing income while providing protection against the downside, as well as seeing some appreciation. But what does strategic income mean exactly?

What Are Strategic Income Investments?

Strategic Income is a strategy that seeks a positive absolute return by investing primarily in fixed-income securities across a spectrum of asset classes. These include high-yield bonds, investment-grade bonds, mortgage- and asset-backed securities, as well as convertibles.

Strategic income refers to not only looking for high-yielding investments, but the ability of the fund to be agile based on current economic conditions. One of the most common ways investors employ an income strategy is to buy corporate or government bonds. So, for instance, when the Fed raises interest rates, you may have a wave of investors allocate some of their holdings to bonds to buy cheaper-priced bonds with a higher yield.

Bonds represent a loan made by an investor to a borrower, most often a corporation or government entity. A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Think of the owners of these bonds as a credit card company making loans to consumers to finance their spending.

The interest payments are the steady, predictable income the investors receive until the time the bond matured. A common portfolio has a healthy mix of income-producing fixed-income securities and equities, among other vehicles. Over time, building a large income portfolio can make all the difference when fighting the uphill battle of the rising cost of living.

This strategy is built around a highly active and flexible approach that invests in any income-producing security around the globe and across various sectors, credit quality ratings, and issuers to find the best value. This makes it possible to provide attractive risk-adjusted returns, in addition to the income. It combines top-down macroeconomic considerations with credit research to comprehensively assess risk and reward across the fixed-income market.

Why Invest In Strategic Income?

The why may seem self-explanatory by now, who doesn’t want a little extra cash coming in? By allocating part of your portfolio to fixed-income securities, you are building a solid foundation for your financial freedom. They may not be the sexiest investment vehicle ever, but the guaranteed income can play a vital role in our wealth-building journey.

The active management of these securities is a bonus, meant to drive even more value for owners of the security, regardless of what the overall market is doing. Say there is a big change in the bond market that could affect the value of your holdings or the yield they produce, the managers can make adjustments that will benefit investors.

This income becomes even more important the closer we all get to retirement. These are the years we all look forward to hanging up the work attire, knowing our income now comes from another source — or possibly multiple sources. The investments we made in the past quite literally are going to pay off in the future. The key is to prepare now, not later, for this eventuality.

How To Invest In Strategic Income

There are a few variations of how a manager might employ a strategic income, but luckily, you aren’t responsible for the active management part of it. All you as an investor need to do is familiarize yourself with the concept behind this approach and who the fund manager is. This is key to investing; never invest in something you don’t understand.

Fortunately for us, there is no shortage of ways to allocate some of our portfolios to this method of investing, Magnifi can help. By simply running a search for Strategic Income, you have all the possibilities you need at your fingertips. You are one step closer to the financial freedom we all strive for.

References:

“How Many Streams of Income Should You Have?”, June 03, 2017, Passiveincomemd.com, https://passiveincomemd.com/many-streams-income/.
“Workers’ wages continue to climb, but not as fast as inflation”, July 29, 2022, CNN.com, https://www.cnn.com/2022/07/29/economy/worker-wages-inflation/index.html.
“Interest Rate Risk”, March 10, 2023, Corporatefinanceinstitute.com, https://corporatefinanceinstitute.com/resources/risk-management/interest-rate-risk/.
“The Ultimate Guide to Bonds”, May 7, 2020, Money.usnews.com, https://money.usnews.com/investing/investing-101/articles/the-ultimate-guide-to-bonds.
“How to Create a Modern Fixed-Income Portfolio”, March 21, 2022, Investopedia.com, https://www.investopedia.com/articles/bonds/07/fiportfolio.asp.
“Will Your Retirement Income Be Enough?”, March 28, 2023, Investopedia.com, https://www.investopedia.com/retirement/retirement-income-planning/.

Disclosures:

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The information and data are as of May 12, 2023 unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

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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, liquidity, prepayments, and other factors. REIT risks include changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.

Active portfolio management, including market timing, can subject longer term investors to potentially higher fees and can have a negative effect on the long-term performance due to the transaction costs of the short-term trading. In addition, there may be potential tax consequences from these strategies. Active portfolio management and market timing may be unsuitable for some investors depending on their specific investment objectives and financial position. Active portfolio management does not guarantee a profit or protect against a loss in a declining market.

Asset Allocation does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.