A bond ladder is a portfolio strategy where an investor owns multiple bonds with different maturity dates rather than concentrating the entire portfolio in one maturity.
For example, a simple 5 year ladder could include bonds maturing in:
• 1 year
• 2 years
• 3 years
• 4 years
• 5 years
When the 1 year bond matures, the investor can use the proceeds for cash needs or reinvest them into a new 5 year bond, extending the ladder.
Why use this structure?
A bond ladder can help create more predictable cash flows, provide regular access to principal, and reduce the risk of having an entire portfolio mature or need to be reinvested at the same point in the interest-rate cycle.
It can also be structured around specific future liabilities. For example, an investor could align bond maturities with retirement withdrawals, tuition payments, or other expected expenses.
A recent Yahoo Finance article, “Bond Ladders Turn Future Bills Into a Cash-Flow Schedule,” highlighted this idea: instead of viewing fixed income only through the lens of yield, investors can also structure maturities around when they expect to need their money.
Bond ladders can be constructed using Treasuries, municipal bonds, corporate bonds, CDs, or target-maturity bond ETFs depending on an investor’s objectives and risk profile.
A relatively simple concept, but an important tool for understanding how fixed income portfolios can be structured around income, liquidity, and maturity management.
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Sources: WSJ and Yahoo Finance
The views stated are not necessarily the opinion of Cetera Wealth Services, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Bonds - The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.