With the current unpredictability and volatility of the stock market and the economy today, investors are scrambling to make sense of a coronavirus ravaged economy. Perhaps the biggest unknown for investors at the moment is when and how a coronavirus vaccine will be available to help the economy to recover.

What do we know? Interest rates could remain close to zero through 2022 to help the economy weather the coronavirus crisis, according to an announcement by the Federal Reserve in June.

For many, this means pivoting to include more fixed income investing strategies, which has the potential to return steady income without the inherent risks associated with the stock market. But there’s more to fixed income that just retirement. Income-oriented assets can also play a role in investor portfolios during their working years as a way to augment their ongoing income streams, leverage dividends to boost portfolio performance, or serve as an income source once they stop working.

The fact is, income can play many different roles depending on where a client is their lives, from work to retirement. Here’s what all investors should know about fixed income investing in today’s volatile market.

What is fixed income investing?

Simply put, fixed income investing is focused on the “preservation of capital and income,” according to BlackRock.

Fixed income assets generally work as part of a diversified portfolio to protect against losses when the market dips. They are particularly helpful for investors who are close to retirement and may not have the time to wait for the market to recover after it swings. Or, in 2020, as a diversification tool for all investors given the economic uncertainty caused by a worldwide pandemic.

Fixed income investing is achieved by curating government and corporate bonds, CDs, and money market funds.

So what are these “safe” assets, exactly?

Bonds and CDs both are a type of loan wherein the investor lends money to the entity issuing the bond or CD with the expectation that the product matures, the investor will receive their principal back in addition to earned interest.

Bonds are issued by companies or governments. They pay buyers a specific interest rate over a certain period of time. A bond yield is locked in when you buy a bond. So, short of the issuer defaulting on payments, an investor can expect a consistent amount of annual income until the bond matures. This means that you don’t have to bite your nails every morning as the market swings. And it’s worth noting that in the long game-over the last 20 years— bonds have actually outperformed stocks.

But, investor beware…not all bonds are the same. Bonds issued by companies that have lower credit rates are more risky, for example.

CDs are essentially a loan to a bank that is insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Money market accounts are similar, although more liquid than CDs because you don’t have to commit to a certain length of time before pulling the money out.

The best news about all three types of investments is that while they might sound boring to a stock savvy investor, they guarantee the return of a principal. Stocks don’t offer that same guarantee, of course.

What are the risks of fixed income investing?

While it’s a more conservative way to invest, fixed income investing still carries risk.

The bond market, although it tends to fluctuate less than the stock market, is still considered volatile. Specifically, “when interest rates rise, bond prices fall,” according to BlackRock. In other words, when interest rates move higher, the bonds that an investor owns will lose value. That can be bad news for investors as interest rates eventually dig out from their current all-time lows.

Also, if inflation outpaces the fixed amount of income that bonds provide, the investor will lose purchasing power. In selecting corporate bonds, investors are taking on the risk of an issuer defaulting on its debt obligation. In such a situation, the investor may ultimately lose out.

Lastly, it’s possible that an investor might want to sell a fixed income asset but is unable to find a buyer.

While fixed income investing can offer higher returns, the key take away is that they can also be associated with greater risks associated with credit and interest rates.

What are the fixed income options?

The pandemic is making all stakeholders in the markets behave a bit differently than they likely would have in a pre-pandemic world. Governments are slashing interest rates to all time lows and issuing bonds to support businesses through the economic downturn. Corporations are also looking for ways to weather the decline until the economy recovers. Here are some less traditional fixed income assets you should consider.

Corporate bonds. Corporate bonds are “debt obligations issued by corporations to fund capital improvements, expansions, debt refinancing, or acquisitions,” according to Fidelity. These bonds are typically “rated by one or more of the three primary ratings agencies: Standard & Poor’s, Moody’s, and Fitch,” which determine ratings based on a company’s financial health, or rather the ability of the issuer to make interest payments and return an investor’s principal.  Corporate bonds are either investment grade or non-investment grade (also known as high-yield, as discussed below).

High-yield bonds. Riskier than Treasuries, but often offering higher yields, these have the potential to appreciate if the economy picks up. High-yield bonds are also less correlated with interest rates than other fixed income investments making them a good option for diversification. High-yield bonds are typically corporate bonds that offer a higher rate of interest but carry a greater risk of default. High-yield bonds are often packaged in funds that help to make them less risky.  

Convertible bonds. Convertible bonds are being issued at the highest rate since 2001, according to Fidelity Investments. This is because companies are using convertible bonds as a way to raise money until businesses can return to business as usual. Convertible bonds are less risky than traditional corporate bonds. Also, they carry the option of being able to convert the bond into the common stock of the underlying company, hence their name, convertible.