When you buy bonds for the long term, you're often looking for regular income. But what happens when a long-term bond that's paying 7% matures, and the best you can find to replace it is one paying 5%?
One way to forestall that problem is to use a technique known as
laddering.
When you ladder your bond portfolio, you divide your investment among intermediate-term bonds that mature in a rolling sequence every one or two years instead of putting all of your money into a single issue.
Each time bonds mature, you reinvest the principal in new bonds to extend the pattern of maturation dates you've established. That way, if you have to settle for a
lower rate for a third or a quarter of the money you have committed to bonds, the rest is still invested at the older rate. And when the next bonds mature, the rates may be up again. What's more, if you need the principal for another investment or to meet certain expenses, you don't have to liquidate your entire portfolio.
With a similar technique, known as
barbells,
you spread your interest-rate risk by putting half of your principal into long-term bonds (20 to 30 year terms) and the other half into short-term bonds (a term less than one year), ignoring intermediate-term bonds altogether. That way, you can lock in higher long-term rates for part of your investment, while staying agile with the rest.
Alexandra Lebenthal, President and Chief
Executive Officer of
Alexandra &
James, Inc.
Alexandra Lebenthal, President and Chief
