In recessionary times, many investors jump out of the volatile stock markets and run for the perceived safe haven of the bond markets. But you should be aware, fixed-income investments are not risk free.

Fixed income investments are fixed in the sense that if the bond is held to maturity, the bond’s yield is the expected annual return to the investor, and the issuer will repay the principal at maturity. However, interim price volatility can be extreme for a number of reasons, such as the inverse relationship between bond prices and interest rates, a change in the bond’s credit rating, and the liquidity of the bond.

In addition, the potential for default by the issuer may result in a loss of principal. While relatively higher yielding bonds seem attractive, there is no free lunch. If a bond has a higher yield than its peers, this generally indicates that there is greater risk of default.

AMG National Trust Bank guards against these risks by first examining the financial strength of the issuer. AMG takes a conservative approach to fixed income investments by understanding risks and not chasing outlandish returns.

With proper management, bonds might be considered the safer allocation in the portfolio. Nevertheless, investors must be aware of the risks associated with fixed-income investments and use a conservative approach.