Laddering Bonds: Basics To Know

Volatility of income can be as much a concern as the volatility of growth, maybe more because the income is an immediate need. Therefore it makes sense to say that a strategy to stabilize income is a necessary part of the portfolio management - and "bond laddering" can help you get there.

Let's first understand that short-term rates generally lower than long-term rates. In simple terms, the longer the maturity of a bond, the more risk you take, and thus the higher the interest rate reward for that risk.

We also know that, over time, will change interest rates. Sometimes they go up, sometimes they go down, but they are always doing something.

Finally, no investment objective lasts forever - and the opening of "windows" of liquidity can help meet our changing needs.

The building of a bond ladder can be a simple way to achieve the above.

We start with the length of the ladder. If our income is needed in the long term, we can go as long as 15 years. If our income is less necessary, we can adjust accordingly.

The rungs of the ladder are the bonds themselves and to fall apart, our ladder, the bonds have equal weighting.

Then we will have to know how far apart to space our sports. One year from maturity gives more fluidity "windows", less income volatility and greater diversity bond - but in some cases this may be impractical. Two years sports are not going to work for the short term ladders, but can apply for the longer term.

If a sport (ie bonds) does adult, you can either put the proceeds in your pocket, or you can reinvest the proceeds in another type of investment, or you can buy another bond to extend the ladder.

That was pretty easy, huh?

Ok, one more ingredient before you actually start buying bonds.

Most bonds pay interest semi-annually. Most investors want income more often. If that's the case with you, beware when the payments are made.

I want to set up a spreadsheet that both the dates of maturity and the date of payment applies. If I buy a bond with a maturity of three years pay in March and September, I'll buy that data when I pay to avoid. Different bonds with different maturity dates

Of course you can stagger payment dates to fit your lifestyle. Property tax payments, quarterly income tax payments, would even holiday spending a situation where you overweight create your monthly payments.

Now our ladder is completed, and we can take a look. The results

Income is paid on a regular basis and the compound interest is near the middle of the yield curve.

If a bond, you have the flexibility to reconsider your investment options.

If buying another tape is required, you will notice that there is little disturbance in absolute income because most of your portfolio weighting is still intact.

Sometimes it's the simple things that work best.

Glenn (? Chip?) Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco / Private Ledger and a principal with Dahlke Financial Group. He is licensed to securities transactions with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You can dahlkefinancial@sbcglobal.net with him e-mail contact. You can also contact him directly to the Living Trust Network Web site is