Americans are uncertain about fixed income, the role it plays in retirement planning and how the asset class responds to market cycles, according to a study from BNY Mellon Investment Management.
Fixed income, the report explained, is an important ingredient for a well-diversified portfolio regardless of an individual’s stage of life, as it may enhance overall risk-adjusted portfolio returns and potentially lower portfolio volatility during difficult market periods.
But a majority (80%) of boomers believe that fixed-income investing is intended only for retirement planning, 70% of millennials agreed and 70% of Gen-Xers said the same.
Also, when asked, “At what point in time should the average investor consider adding fixed income to their investment portfolios?” More than a third (36%) of millennials responded, “I don't know,” compared with nearly half (45%) of boomers, who are much closer to retirement age, if not already in their retirement years.
Millennials, however, have a greater level of understanding over their older cohorts of fixed-income investing, the study found. Almost half (43%) reported having any fixed-income allocations in their portfolios compared with 32% of baby boomers.
But Liz Young, director of market strategy for BNY Mellon Investment Management, said regardless of age there remains confusion around fixed-income investing, as well as the important role it can play in long-term financial planning. She added that the data also suggested that financial advisors can communicate more effectively how a fixed-income allocation can help provide a steady stream of income for a variety of personal circumstances and across economic cycles.
The research also pointed gender differences around fixed income and how men and women approach risk. It found that men appear to invest more heavily in fixed income than women, with nearly half (49%) of men reporting having some percentage of their investment portfolios with an allocation toward fixed income compared to just 29% of women.
And while just 29% of men reported they “do not understand [fixed-income investing] at all,” nearly half of women (49%) said the same. Moreover, 46% of women expressed they didn't know at what point in time the average investor should consider adding fixed income to their investment portfolios, but only a third of men (33%) said the same.
In terms of how fixed-income strategies react to changing interest rate environments and market volatility, the research found that men and women expressed varying levels of uncertainty. Twenty-four percent of men said they "wouldn't know what to do" compared with 42% of women.
And in the event of a stock market sell-off, defined here as a rapid selling of securities beyond the daily ebb and flow of market prices, 28% male versus 50% female said they didn't know what they would do.