Bond Laddering
Investors can never be completely certain as to where yields on bonds are headed. A popular way for investors to help balance risk and return in a bond portfolio is to utilize a technique called laddering. To build a laddered portfolio, investors purchase a collection of bonds with different maturities spread out over their investment time frame. By staggering maturities, investors may be able to reduce the impact that changes in interest rates can have on their portfolio.
For example, an individual who wishes to create a laddered portfolio could purchase bonds that mature each year during a span of ten years. By using a rollover strategy as well, when the first bond matures, the investor could reinvest those funds in a bond that matures in ten years. As each bond matures, the investor would continue this process. After ten years, the investor would own all ten-year bonds, with one maturing every year. By laddering the bond portfolio, an investor can worry less about fluctuations in interest rates. If interest rates rise, the investor knows that he or she will soon have money available, from a maturing bond, to take advantage of a new bond. If interest rates should fall, then the investor has at least managed to secure higher rates for a portion of their portfolio.This strategy can also be used with CDs.
Bond laddering does not assure a profit or protect against loss in a declining market. Yields and market values of bonds will fluctuate and if sold prior to maturity may be worth more or less than the original investment.
For more information on the laddering technique and to determine if this strategy is right for you, contact your investment professional.