Fixed income securities usually aren't

I was just looking at the online summary for my old UBS account and noticed that they had separate lines for "Cash" and "Fixed Income", which seemed odd although technically accurate. The cash portion is actually a "deposit" in the banking sense. But then I realized that "fixed income" is somewhat of a misnomer for money market mutual funds and bonds funds where, almost by definition, the payments and rate of return are highly variable rather than fixed. My accounts with Muriel Siebert & Co list "Cash and Cash Equivalents", which is much more sensible. Fidelity categorizes information on their web site about money market funds under "Fixed Income", while on their statements they simply lump them in with other "Mutual Funds."

The reason I bring this up is simply to highlight the need for rational terminology so that we can understand each other. The primary use that I have in mind is for describing asset allocation. Lumping both money market funds and bonds under "Fixed Income" is rather useless.

I would prefer to use the term "Cash" as being simply a shorthand for "Cash and Cash Equivalents", which should include money market mutual funds, bank checking and savings accounts, short-term bond bunds (no more than a year), T-bills, short-term CDs (no more than a year), and anything else that is liquid enough that you won't take a "haircut" to sell it and convert to something you can debit from your account without accruing some significant cost or liability.

We may also need to have a distinction between "Cash" and what I would call "Near Cash", which means that there might be some modest penalty, such as early withdrawal from a CD or selling a T-bill before its maturity or a short-term bond fund when interest rates are volatile.

I think the terms I would prefer to use would be "Cash" as I described above (including 1-year CDs and short-term bond bunds), "True Cash" which is really only bank checking and savings and money market mutual funds, and "Near Cash" which includes short-term CDs and short-term bond bunds.

Now, we have this lingering conundrum with T-bills, where on the one hand they are "Near Cash" and literally just as safe and sound as Cash, but technically still fall under even the purest definition of "fixed income", namely that the total return if held to maturity is fixed.

Incidentally, that purest definition for "fixed income" would exclude TIPS and I Bonds since their total return will vary, based on changes in the rate of inflation.

We could tweak that purest definition for "fixed income" to say that the return at redemption by the issuer is not subject to market pricing. Though technically accurate, that does seem to be a somewhat odd way of defining "fixed income" and flies in the face of an asset allocation category that is supposed to yield a fixed rate of return.

The best way out of that conundrum may simply be refer to such assets as "debt securities", some of which offer "fixed income", and some of which offer "variable income".

In terms of an asset allocation model, I would suggest we use the following terms for the main three traditional asset categories:

• Cash - includes cash equivalents, such as money market mutual funds, T-bills, short-term CDs (no more than 1-year), and short-term bond funds (no more than 1 year)
• True Cash - immediate liquidity with no penalty, fee, time requirement, or market risk
• Near Cash - may have a modest penalty, fee, time requirement, market risk, consists of T-bills, short-term CDs, and short-term bond funds
• Stocks (or Equities)
• Debt Securities - Treasury notes, bond funds (greater than 1 year), longer-term CDs, corporate debt, government agency debt
• Fixed Income - total return defined in advance. This will tend to exclude virtually all bond funds since their rate of return will not be fixed.
• Variable Income - total return will vary based on either being a bond fund whose composition varies over time or may be traded by the fund, or non-market conditions (e.g., inflation and Fed funds rate, prime rate, 10-year Treasury rate). This will include essentially all non-short-term bond funds

One remaining issue is how to treat the traditional, vague, loose term of "bond." I would suggest that we presume that the term "bond" refers to what I categorize as "Debt Securities", which excludes the short-term assets. So, I offer this as an alternate nomenclature for my main nomenclature:

• Cash
• Bonds
• Stocks

This presumes that the distinctions in my main terminology hold, particularly that short-term debt is considered Near Cash under Cash.

But, let's stop referring to assets as "Fixed Income" when the income is clearly not fixed!

-- Jack Krupansky