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Creating a Laddered Bond Portfolio

September 13, 2012

A previous blog on fixed income investing generated a lot of calls and emails.  So much so, that I want to expand on it.


Most people look to fixed income investments to provide security along with cash flow.  The problem is that many of the ways people invest right now are providing very little income.  Bank insured certificates of deposit that could always be counted on, now yield less than 1.5% for five years and shorter terms under 1%.  Treasury Bills are less than 0.2% and five-year T-Bonds are less than CDs.  Corporate and municipal bonds are low-yielding unless you go out for longer terms.  Bond funds yield low current interest and are extremely susceptible to sharp decreases in value if interest rates jump up.  What is the average investor to do?


I suggest a laddered approach to fixed income. This is where you buy bonds with staggered maturities so that some principal comes due at regular intervals.


A way to create a ladder is to divide your fixed income money into five or ten equal groups with each group coming due every year, or every other year.  You can stretch the period over five, ten, twenty or more years.  For example if you have $200,000 to invest, you can set up your portfolio so that $20,000 matures every two years for the next twenty years.  By doing this you will be stretching the maturity dates and will get higher yields on the longer-term bonds, raising your portfolio’s yield.  When the bonds mature, they can be reinvested at the then current rate for the longer term at the end of the ladder.  This will increase the overall portfolio yield, or will provide cash if you want to invest or use it otherwise.


Many people do not like to go out long-term feeling that they will lose the opportunity to grab the higher rates should that occur in the future.  This is so, but while they are waiting they will be earning the low short term rates.   In the long run they will not only earn less, but probably will not take the higher rates when they arise because they will always be waiting for rates to go even higher.  That way they will continually be earning the lower short-term rates rather than investing at the higher longer-term rates at the end of their ladder.


Bond value fluctuations should not be a concern since the intention of the ladder is to hold all the bonds until maturity. Further, when you start the ladder, you can use CDs if those rates are greater than bond rates.


Think about it.  For many people, ladders work.


For additional information go back and look at my earlier blog post, here.

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