The decision that will have the biggest impact on your investment returns is your asset allocation – the percentage you assign to equities and the percentage you assign to fixed income.
Bonds are a popular way to generate predictable returns with lower risks – fixed income – but they aren’t the only one.
A few other fixed income vehicles that you should also consider:
- Savings account – a bank account which pays (low) interest rates.
- Money market accounts – these are interest-bearing accounts which may pay higher interest rates than a normal savings account. The interest rates are higher because the money is invested in different assets than regular savings accounts.
- Certificates of Deposit – similar to a savings account in a sense that it pays interest on the deposited amount. Certificates of Deposit usually pay higher interests than savings account (and money market accounts) because withdrawing the funds is restricted until the maturity date.
Bond and bond funds have credit risk – you could loose your capital due to a borrower becoming insolvent. The advantage of savings accounts, money market accounts and certificates of deposit is that they are covered by Deposit Insurance schemes. That is there is no credit risk if the money invested is within the insured amount. All countries from the EU insure deposits up to EUR 100,000. Some countries have mechanisms that may insure amounts higher than the EU minimum of 100,000.
Different fixed income vehicles give different returns with different risk profiles. By taking a broader view of the alternatives you can pick the one that suits your needs better.