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We’ve all got that party animal friend. The one who is the life of the party one week… then the next week, they flake on plans or show up in a completely different mood. Their good is great... but their bad can be more volatile than a toddler who has missed nap time.

Shares can often behave the same way. There’s big upside and big energy, but they’re not always consistent.

In fact, only 28% of individual stocks on the S&P500 actually beat the S&P 500 index in 2024. So if you’re picking individual stocks, the odds are VERY much against you.

That’s where fixed income quietly earns its keep in a diversified portfolio. They’re not going to shoot the lights out like a high-risk stock, but they can help to reduce the volatility of your portfolio. And almost nobody wants to be totally high-risk.

Okay so what actually is a fixed income security?

Fixed income securities are basically loans that you make to governments or companies. You lend them money, they agree to pay you interest (known as “coupons”), and then return your money at the end of the term (called “maturity”).

The main appeal of fixed income securities is their ability to offer predictable income over time. There are a few different types of fixed income securities:

1. Government bonds

This is when you lend money to the government (think Australian, US, UK or other governments). They’re considered very low risk because the government is expected to pay you back (helloooo tax money).

For government bonds, the returns are usually lower, but they’re valued for stability and reliability. There are also government bonds issued by State Governments - these are slightly higher risk than federal government bonds, so there is often a bit more yield to compensate.

2. Corporate bonds

These are loans to companies who are looking to raise funds for business growth, day-to-day operations or capital expenditure.

Unlike investing in shares, when you purchase a corporate bond, you don’t have any ownership in the company. In terms of yield, a big, profitable company will generally pay a lower interest rate thana smaller or shakier one (because it’s less risky).

3. Certificates of Deposit (CDs)

These are bonds issued by banks and other financial institutions. Most CDs in the US are insured by the FDIC (up to$250,000 per account) so it makes CDs among the safest investments available.

4. T-Bills and other cash-like securities

There are also a number of short-term bonds like Treasury bills (up to 52 weeks to maturity) or very short-dated bonds. These sit somewhere between cash and bonds. Since they are shorter term they typically have lower returns, but are very stable and useful when you want flexibility.

Put together, these different securities can smooth out a portfolio that might otherwise be at the mercy of share market mood swings.

Why fixed income plays such a useful role

The simplest way to show the value of fixed income securities is through a sports analogy. Shares are your forwards. They score flashy goals. They have the star power. But they aren’t protecting your backline.

The fixed income is your defence. Fixed income securities are there to absorb pressure and keep things steady so that a bad market run doesn’t blow out the scoreboard.

That’s why many diversified portfolios include a mix of growth assets like shares and defensive assets like fixed income.

So where can I get these fixed income securities from?

The challenge is that most Australians don’t buy bonds directly. Minimum investments are often extremely high - yep, sometimes tens or hundreds of thousands of dollars.

On top of that, you need to choose the issuer, the maturity and then figure out what to do when bonds roll off. And for something designed to calm your portfolio, that’s a whole lot of admin.

That’s the beauty of fixed income ETFs - they bundle dozens or even hundreds of bonds into one investment.

●     One trade gives you instant diversification across borrowers, sectors, and maturities.

●     They trade on the ASX like shares, so it means they’re easy to buy and sell

●     The reinvestment and maintenance are handled for you

So whether your goals are income, diversification or total returns, Franklin Templeton’s range of fixed income strategies can play a role as part of a diversified portfolio.

Find out more about Franklin Templeton’s fixed income capabilities

Disclaimer:

All information contained in the Flux app, www.flux.finance, www.joinflux.com, app. flux.finance and any podcast of FluxMedia Pty Ltd (ABN 27 639 804 345) is for education and entertainment purposes only. It is not intended as a substitute for professional financial, legal or tax advice. While we do our best to provide accurate information on the podcast, we accept no responsibility for any inaccuracies that may be communicated.

Flux does not operate under an Australian financial services licence and relies on the exemption available under section911A(2)(eb) of the Corporations Act 2001 (Cth) and ASIC RG 36.66. Flux Technologies Pty Ltd provides general advice on credit products under our own Australian Credit Licence No. 530103. The product information presented does not constitute an offer and we are not recommending or suggesting any particular product.

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