A new study shows that 92% of Americans don't understand fixed-income investing - the cornerstone of retirement planning
- Only 8% of Americans surveyed by BNY Investment Management could correctly define fixed-income investing. The remaining 92% got it wrong or admitted they didn't know.
- Some experts view this as a problem because fixed-income investing is the cornerstone of retirement planning, and can also help investors balance risk in their portfolios.
- Still, there's a lot of confusion about when, how, and why fixed income investing can be beneficial to investors.
- Read more on Business Insider.
Most Americans are not able to define fixed-income investing and have a limited understanding of how it works, according to a study from BNY Investment Management.
The study surveyed more than 2,000 American adults, and found that only 8% could correctly say what fixed-income investing is. Of the remaining 92%, 56% answered incorrectly and 36% admitted that they couldn't define the term.
For context, BNY defines fixed-income investing as "an investment in corporate and/or other government bonds that pays investors periodic interest payments until their maturity dates."
The lack of knowledge about fixed-income investing is a problem because it means many Americans are likely missing out on two of its big benefits, Gautam Khanna, senior portfolio manager at Insight Investment - a BNY Mellon investment firm - told Markets Insider in an interview.
Fixed-income allows investors to generate a "stable, predictable, reliable source of income" that's higher than a bank account or CD. It also adds diversification to a portfolio, he said. These make fixed-income investing a cornerstone of retirement planning, as retirees need to protect assets and live off of the income.
But fixed-income investing isn't only beneficial to those thinking about retirement, Khanna said. Having a diverse portfolio that includes fixed income is important because it adds insurance to riskier assets like stocks, he said, which can shield investors from losses during times of high volatility.
The study found that 39% of those surveyed have some portion of their investment portfolio in fixed-income assets, which Khanna said likely means the remaining ones are either not invested in the market or are mainly in equities and exposed to periods of heightened volatility.
"We are a decade-plus into the cycle, and risks are building," said Khanna, which mean lower rates of growth, choppier earnings, and whiplashing in the equity market. "Don't you want to have part of your portfolio that actually benefits from that volatility?" he said.
Here's where investors were confused about fixed-income investing, according to the BNY Investment Management survey:
- 67% of respondents said they believe that investing in equities requires more knowledge and skill than fixed-income investing.
- 50% said they believe that the best way to maximize the value of fixed-income investments is through holding individual bonds instead of a mutual fund investing in bonds.
- 44% believe that investors must hold bonds to maturity.
- 43% think that fixed-income returns cannot approach equity-fund returns.
- 28% believe fixed-income investing is only for retirement planning.
- 40% said they don't know when the average investor should consider adding fixed income to their portfolio.