Explore the Variety: Customize Your Fixed Income Allocation

David Grimaldi
Morgan Stanley Financial Advisor
Madison Avenue Location
(866) 651-8625

All bonds are not created equal. Savvy investors recognize that asset allocation can help manage investment risk. Although there is no guarantee that a specific asset allocation will meet your investment objectives or generate a certain amount of income, diversifying your fixed-income portfolio may help you more effectively balance risk and return potential.

Vary Maturities
Longer-term bonds usually offer higher yields, but are more sensitive to interest-rate fluctuations than similar coupon shorter-term issues. Some risk-averse investors purchase only short-term issues, settling for lower yield. Other investors choose longer-term bonds for higher return potential, taking on more market risk. Choosing a range of issues with staggered maturities, perhaps through a laddered portfolio, may help improve return potential and minimize interest rate risk.

Consider Quality
With some types of bonds such as U.S. Treasury securities, which are backed by the full faith and credit of the U.S government, the risk that the issuer may default on a payment of interest or principal is extremely low. However, modest yields often accompany this high degree of credit quality. If you seek higher yields by taking on a higher degree of risk through investing in issues of lesser credit quality, diversifying among different issuers may help reduce your total exposure in the event of any single issuer’s default.

What is your Tax Bracket?
Many investors who are in the higher (28- 35%) tax brackets gravitate towards municipal bonds primarily for one reason: tax-exempt income. Municipal bonds are considered second to Treasuries in terms of credit quality, which adds to their appeal. Income from municipal bonds may be subject to state and local taxes as well as the Alternative Minimum Tax (AMT). Call features may exist that may impact yield. If sold prior to maturity, investments in municipal securities are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. Morgan Stanley does not provide tax advice. Talk to your financial advisor to see if municipal bonds may benefit you.

Explore the Diverse Market
The large domestic market for individual bonds offers many choices, such as U.S. Treasury, inflation-protected, tax-advantaged municipal, mortgage-backed, preferred and corporate securities, but there is also an entire world of bonds beyond our borders. Foreign* countries and corporations may also issue bonds, many of which are denominated in foreign currencies, while others are denominated in U.S. Dollars.

*Investments in foreign securities involve risks associated with interest-rate and currency-exchange-rate changes as well as by market, economic, and political conditions of the countries where investments are made. There may be greater returns but also greater risks than with U.S. investments.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument, or to participate in any trading strategy. The securities/instruments discussed in this material may not be suitable for all investors. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives. This is not a research report and was not prepared by the Morgan Stanley research department. It was prepared by Morgan Stanley sales, trading or other non-research personnel. Morgan Stanley makes no representation or warranty with respect to the accuracy or completeness of this material. Morgan Stanley does not render advice on tax or tax-accounting matters. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Clients should consult with their tax advisors before making any tax-related investment decisions.

Investments and services are provided by Morgan Stanley DW Inc., member SIPC.