Ladder to Heaven
The best way to guard your bond portfolo against changes in interest rates is to ladder the maturities on them so that they are maturing continuously. This article shows you how you can construct a bond maturity ladder that will provide you income when you need it.
Instructions
1. Decide how often you will need your notes to mature and how far out you want to structure your maturity ladder. Bonds can have terms ranging from 90 days to 30 years. Of course, the frequency of your maturities will depend somewhat upon the size of your portfolio.
2. Determine the time frame for your ladder. If you are planning on using this ladder for retirement, then you may need to stretch out your ladder to end with a 30-year note. Conversely, a short-term investor may need to only go out 10 years. But remember that the longer you can stretch out the maturities, the more interest you will earn.
3. The kind of bonds that you use for your ladder will depend somewhat on your circumstances. If you are ultraconservative, then you'll want to consider either CDs or government bonds such as T-Bills, Notes and Bonds or perhaps government agency securities such as Freddie Macs, Fannie Maes or Sallie Maes. If you are in a high tax bracket, then tax-free municipal bonds may be appropriate. Or, if you are willing to assume a higher risk, then you may want to try out a series of corporate bonds, although these notes seldom offer maturities of less than five years.
4. If you can alternate maturities between short and long term, such as annually for the first 5 years, then for 10, 15 and 20 years, then you can pretty effectively protect yourself against rising interest rates, because you will have bonds continually maturing that you can reinvest at higher rates, especially in the short term. If you are planning on using the proceeds from your bond ladder in one lump sum at the end of the ladder, then reinvest your maturing notes accordingly so that they eventually all mature at the time of withdrawal.
