fixed income: almost a bedtime story
Post on 12-May-2015
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Fixed Income:
Almost a bedtime story.
Hey!
Where do you think you’re going?
The stock market has been showing signs of life.
And we’re all happy about that,
And we’re all happy about that, but
before you consider rushing back into stocks
can we (please) take amoment to consider
why you might want to leave some of your investments in
fixed income.
fixed income.
HIGH YIELD
MUNICIPAL
fixed income.
ULTRA-SHORT
HIGH YIELD
MUNICIPALSHORT
SHORT-INTERMEDIATE
INTERMEDIATE
fixed income.
HIGH YIELD
MUNICIPAL
ULTRA-SHORT
U.S. GOVERNMENT
TAX-ADVANTAGED
SHORT
SHORT-INTERMEDIATE
INTERMEDIATE
We know.
We get it.
(yawn)
Fixed income can’t compete with the excitement of
Rising corporate earnings
Juicy stock dividends
Charismatic CEOs.
What’s another word for thrilling?
QUESTION:
volatilityANSWER:
Fixed income had its share of volatility recently.
Fixed income had its share of volatility recently.
Psst: Fixed income may also be volatile in the future.
Bonds and bond funds come with their own risks.
Bonds and bond funds come with their own risks.
INTEREST RATE RISK
INFLATION RISK
DURATION RISK
Bonds and bond funds come with their own risks.
INTEREST RATE RISK
CREDIT RISKINFLATION RISK
DEFAULT RISK
DURATION RISK
Over the long term,
fixed income could hardly be accused
of being thrilling.
Bond Investing Has Avoided Deep Negative ReturnsAll-Stock, All-Bond Performance — 1970 to 2008
Past performance is not a guarantee of future results.
This chart compares the performance of an all-domestic stock portfolio and an all-bond portfolio for the period from January 1, 1970, through December 31, 2008.
Source: ChartSource, Standard & Poor’s Financial Communications. Domestic stocks are represented by the total returns of Standard & Poor’s Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by a composite of the total returns of long-term U.S. government bonds, derived from yields published by the Federal Reserve, and the Barclays Long-Term Government Bond index (prior to November 2008, the Barclays indexes were compiled by Lehman Brothers).
1970
–50%
–40%
–30%
–20%
–10%
0%
10%
20%
30%
40%
50%19
72
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
200
0
2002
2004
2006
2008
Ann
ual T
otal
Ret
urn
Bonds Stocks
And that’s the way we like it.
(sigh)
People may like investing some of their savings in fixed income
because of what it may do for them.
Fixed income in a diversified portfolio could add that something extra
that may broaden your world
beyond stocks of public companies.
beyond stocks of public companies.
STATE GOVERNMENTS
BUILD AMERICA BONDS
LOCAL GOVERNMENTS
beyond stocks of public companies.
STATE GOVERNMENTS
U.S. TREASURIES
BONDS OF CORPORATIONS
REVENUE BONDS
BUILD AMERICA BONDS
LOCAL GOVERNMENTS
And maybe even help cut back what you pay in taxes.
Why are you investing? QUESTION:
Because you want to see your investments grow.
ANSWER:
That’s why you may need some fixed income.
And bond markets rally, too!
And when they’re not rallying
most bonds are generating income.
Invest in stock and bond markets together
and you have the possibility for
growth
Bonds Beat Stocks, Cash and Inflation Major Asset Classes, Annualized Total Returns — 1988 to 2008
Past performance is not a guarantee of future results.
This chart compares the annualized total returns of stocks, bonds and inflation, through December 31, 2008, over the past 5-, 10- and 20-year periods.
Source: ChartSource, Standard & Poor’s Financial Communications. Stocks are represented by the total returns of Standard & Poor’s Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by the total returns of the composite of long-term government bonds (10+ years), constructed from yields published by the Federal Reserve, and the Barclays Long-Term Government Bond index. Cash is represented by the composite of the yield of 3-month Treasury bills published by Federal Reserve and the total return of the Barclays 3-Month Treasury Bill index. Inflation is represented by the change in the Consumer Price Index. Note that prior to November 2008, the Barclays indexes were calculated by Lehman Brothers.
–4
–2
0
2
4
6
8
10
Past 20 Years Past 10 Years Past 5 Years
9.79%
8.43%
4.53%
2.82%
8.07%
–1.38%
3.49%
2.52%
9.58%
–2.19%
3.30%2.67%
Ann
ual T
otal
Ret
urn
Bonds
Stocks
Cash
Inflation
Boring?
Boring?
(yawn)
We don’t mind putting you to sleep talking about fixed income.
Psst: The show’s almost over.
We don’t mind putting you to sleep talking about fixed income.
Because fixed income
is meant to help you sleep at night.
(zzzzz)
IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. For more information about this notice see http://www.northerntrust.com/circular230
Risk Considerations
Equity Risk: Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in high-grade fixed income securities. The net asset value per share of this Fund will fluctuate as the value of the securities in the portfolio changes.
Bond Risk: Bond funds will tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price, especially for longer-term issues and in environments of rising interest rates.
U.S. Government Guarantee: U.S. Government guarantees apply only to the underlying securities of certain “government fund” portfolios and not the fund’s shares.
High-Yield Risk: Although a high yield fund’s yield may be higher than that of fixed income funds that purchase higher-rated securities, the potentially higher yield is a function of the greater risk that a high yield fund’s share price will decline.
Tax-Free/AMT Risk: Tax-exempt funds’ income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax.
Regional Investment Risk: The geographical concentration of a regional fund’s portfolio holdings may involve increased risk.
Diversification alone does not guarantee a profit nor protect against a loss.
There are risks involved in investing including possible loss of principal. There is no guarantee that the investment objectives of any fund or strategy will be met. Risk controls and models do not promise any level of performance or guarantee against loss of principal.
Before investing you should carefully consider the fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by calling 877-867-1259. Please read the prospectus carefully before you invest.
Shares of Northern Funds are distributed by Northern Funds Distributors, LLC, Boston, MA 02110, not affiliated with Northern Trust.
May lose value / No bank guaranteeNOT FDIC INSURED
Fixed.ologySM
TH E L ANGUAGE OF F IXE D INCOME
For information on a variety of fixed-income investing topics, visit northerntrustinvestments.com/fixedology
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