How To Manage Fixed Assets

The "true" Fixed Assets category includes: Bank CD's, Treasury and General Obligation (GO) Municipal Bonds.

One may notice that Corporate, Revenue Municipal Bonds, Commercial Paper and Mortgage Backed Securities are not included in this list. The reasoning behind this is that although these investment instruments have a fixed rate of interest, they are not backed in any measure by the full faith and credit of the United States government. The deep recession we are currently in is partially because of Commercial Paper and Mortgage Backed Securities. As a result, we shouldn't consider these as fixed assets because they can definitely collapse. The same applies for corporate bonds, which are notes of debt issued by corporations, and also Revenue Bonds which for the most part are the "safest" of these categories, are issued by either the U.S. Federal Government or a U.S. State Government, but are backed by the revenue of a specific project that the bond provides funding for. An example: If the project that the bond was issued for goes broke, then so will the bond. This is why there is a rating system for bonds that operates on a sliding scale: AAA is the highest Rated and then AA, A, BBB and so on and so forth. The rating system was established by a non-partisan, non-interested organization called Moody's. The bond rating system takes many factors into account, and ultimately determines how likely a bond is going to stay afloat for the period of time it was issued for.

A lower quality of bond means that the bond will pay a higher interest rate (yield) or pay out. On the flip side, The higher the quality of bond, the lower the interest rate (yield) or payout will be.

An investor must consider the above details before getting involved with a fixed asset portfolio, or investment instruments with a fixed rate of return. A highly conservative investor who wants to place a portion of money into fixed assets, would likely be comfortable with a portfolio of 60% Treasury Bonds, 20% GO Municipal Bonds, 10% CD's, 5% Corporate and 5% Revenue Bonds. The rationale behind this formula is pure safety with a small chunk for higher interest rates securities. A more aggressive investor would take the opposite approach: 70% Corporate or Revenue Bonds and the other 30% mixed among GO Bonds, Treasuries and CD's. The aggressive investor is looking for a high yield and isn't extremely concerned with complete safety. Time-value plays an integral part in the type of investor someone is. Usually an aggressive investor is young and a conservative investor is older. This is because the younger investor has time to profit and/or recuperate from losses. The older investor statistically, many not necessarily have this luxury.

Fixed assets are generally safe investments, but as we have recently seen, some are not. Treasuries, CD's and GO Municipal Bonds are exceptionally safe, and can be a safe haven in an increasingly complicated investment world. One must determine the type of investor they are, and then decide which percentages of fixed assets they would be content with in their portfolio.


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