The goal of investing in fixed income securities is to provide investors with current income from their portfolios, usually in the form of dividends or interest. A fixed income security is usually debt (investment grade corporate bonds, Treasuries and government notes) or equity (preferred stocks, fixed income mutual funds, and fixed income ETFs). The key element is a structured payment of current funds to the holders of these securities, usually for a specified period of time.

Fixed income securities utilized in KING portfolios are freely traded on market exchanges. Since fixed income securities have a designated yield or payout over time, they do not generally offer the opportunity for appreciation inherent in a pure stock investment. Although the price of a fixed income security can vary at any point in time, an investor usually expects the yield from dividends or interest to provide the majority of his return on the investment.

Investor Objectives: There are two basic objectives an investor seeks when including fixed income securities in an investment strategy: current income and reduced volatility and risk. If an investor needs current income from his portfolio, it is usually preferable to hold securities that generate regular income distributions than to be required to sell stocks to generate the needed funds. Since equity markets are volatile in nature, having to sell stocks at a certain time to raise income could result in an unnecessary loss.

The second objective of utilizing fixed income securities in a portfolio is to moderate the overall volatility and underlying risk of the portfolio. The market value of fixed income securities tends to be more stable than stocks since the return is fixed. By dedicating a portion of a portfolio to fixed income securities, the volatility of the overall portfolio can usually be reduced.

Fixed income securities generally carry less risk than stocks since these securities are often underwritten by assets and/or take precedence in any default or bankruptcy. A balanced portfolio consisting of stocks and fixed income securities is, therefore, generally considered to be less risky. At the same time, less risk usually means less reward potential. A balanced portfolio of stocks and fixed income securities will not have the same appreciation potential as an all-stock portfolio, nor the same chance for loss.

Tax Implications: Tax laws favor investing in stocks over fixed income securities. Gains from stocks held for more than 12 months are subject to Long-Term Capital Gains tax rates, currently topping out at only 15%, while most distributions from fixed income securities are taxed at regular income tax rates as high as 35%. This can have a significant impact on the ultimate returns achieved by an investor. However, in a tax deferred account, such as an IRA, current tax treatment is not a consideration.

KING’s Balanced Portfolios are allocated according to the needs of the client. The typical allocation is:
Fixed Income Securities 30% - 45%
Common Stock 65% - 70%

We can tailor a portfolio with any allocation to meet your needs. In determining the need for including fixed income securities in a client's portfolio and how much, we address the following considerations:

• The need for current income from the portfolio
• The impact of taxes on various client accounts
• The level of risk/reward needed to achieve long-term objectives
• The client's tolerance for market volatility and risk

Managing Risk: Many investors believe that investing in fixed income securities such as bonds is safe and that their principal is not at risk. Although U.S. government issued bonds and CD's are safe from default, the yield an investor can achieve after inflation and taxes is marginal.

Corporate bonds and other fixed income security options provide higher yields, but carry the risk of default by the underlying entities.

Fixed income securities also have market risk. Although not usually as volatile as the average stock, their value for resale in the market can go up or down at any point in time. A significant factor in the market value of most fixed income securities is current interest rates. Since these securities usually have fixed interest payment schedules, a rise in interest rates will make the securities less appealing and their market values will be discounted. If interest rates go down, the opposite will occur.

Properly managing a portfolio of fixed income securities that will achieve meaningful returns over time requires nearly the same level of research and management as a stock portfolio. At KING, we are pro-active in the management of fixed income securities. Diversification is just as important to control risk, monitoring the related company remains vital, and reacting to market and economic conditions is still critical.

Types of Fixed Income Securities: The types and blend of fixed income securities utilized in KING balanced portfolios varies according to a client's objectives and current market conditions. Individual fixed income securities are researched and selected for each portfolio in keeping with the overall diversification strategy. Typical fixed income securities used by KING include:

• Corporate Bonds - A debt security issued by a corporation to raise funds for working capital or expansion. The bond typically pays the holder a fixed interest rate, is taxable, and has an established maturity date.

• Government Securities - A debt obligation of the U.S. government and generally regarded as having no risk of default. The government issues short-term T-bills, medium-term notes, and long-term bonds.

• Preferred Stock - Although a preferred stock is technically an equity security, it has conditions and restrictions that make it more applicable as a fixed income security selection. Preferred stock is issued with a fixed dividend payment providing current income to investors. This fixed dividend also makes the stock's market value fluctuate with changes in interest rates rather than the company's performance.