Portfolio Design
While bond yields
may seem paltry compared to equity returns, they have proven their place in some individual portfolios. Bonds provide diversification
and price stability , which in turn reduces the overall portfolio risk. Bonds with staggered maturities not only provide a
steady income stream, but also reduces interest rate fluctuations and price volatility.
The method of investing
in bonds with staggered maturities is known as bond laddering. I find laddering especially appropriate for clients in or close
to retirement. To begin the process, bonds are bought with their maturities spaced in time intervals. A method that I often
use, sets bond maturities at 1-year intervals for a specified number of years.The number of bonds to purchase , is determined
by the number of years in the ladder. Usually, a minimum of 3 to a maximum of 10 years is practical.You may want to use short
term bond maturities of 1, 2 and 3 years when current interest rates are low, such as now and then when bond yields are higher,
increase the ladder to 10 bonds, with maturities of 1,2,3,4,5,6,7,8,9 and 10 years. By bond laddering this way, a bond matures
on each 1-year anniversary and the principal is returned and is now available to purchase a new bond with the farthest out
maturity, held in the bond ladder. In the above examples, that woud be 3 or 10 year maturity bonds for every 1 year anniversary
of the ladder. Should rates rise as the anniversary date approaches, the entire yield for the laddered portfolio increases,
and you enjoy a higher flow of current income, with the addition of a new bond.
