Planning Briefs
Take Steps To Build A Bond Ladder
Published Friday, May 24, 2013 at: 7:00 AM EDT
Are you striving for greater diversification in your portfolio? You could do it one step at a time with a bond ladder.
With this approach, instead of owning bonds that mature at about the same time, you acquire bonds with varying maturities. Suppose, for example, you have $50,000 to invest in bonds. You might buy five bonds, each with a $10,000 face value, that mature in one, two, three, four, and five years, respectively. To stretch the bond portfolio further, you could get 10 bonds, with a face value of $5,000 each, that mature one a year for the next 10 years.
Bond laddering provides some protection from the vagaries of the marketplace. For instance, if you had invested that same $50,000 in a single 10-year bond with a yield of 5%, you'd have frozen your ability to respond to market changes for the next decade. As interest rates and inflation fluctuated, you'd be unable to take advantage of rising yields or do anything to counter a drop in yields. And 10 years is a long time in the investment world.
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