Laddering Bond Investments

Laddering bond investments is the practice of buying a series of fixed income instruments with intermittent maturity dates. For example, if you had a fixed income portfolio with $10 million, a laddered portfolio would put $1 million into 2-year bonds, another $1 million into 4-year bonds, and so on to 20-year bonds. Another example of a laddered portfolio might place $2 million dollars of investment capital at every four years of maturity. Essentially in a laddered portfolio, you place roughly the same risk capital at equal intervals across the maturity spectrum. This approach is differentiated from a barbell portfolio or a bullet portfolio. The former places approximately half of the portfolio in very short-term bonds and the rest in long-term bonds. A bullet portfolio is concentrated at one maturity.

The reason you would prefer a laddered portfolio is that it spreads your re-investment risk across the spectrum. As your bonds mature, you have to re-deploy this capital. If rates have fallen, you will receive a less favorable rate on the new investment. Laddering your portfolio spreads this risk across time in the hopes that the cost will be minimized over the spectrum. This approach also frees up investment capital on a regular basis that can be easily deployed in other areas if you wish.

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