Bond investors should consider a bond ladder

 In Bond Investing

bond-ladderOne of the questions that we regularly see coming up is, “Should I sell my bonds, now that the stock market is at an all-time high, along with  interest rate increase and a bull market for 30-year bonds?” As usual, when it comes to questions of this nature, the answer is, “Well, it depends on a ‘couple’ of different factors.”

First of all, the answer hinges on what you’re actually holding and why you’re holding your bonds, in the first place. Let’s say that you’ve purchased some bonds with a particular goal in mind and the goal has yet to be achieved. If that’s the case, then there’s really no pressing need, at this time, to sell your bonds. However, if you’ve placed your income investment (fixed) in EFT’s or mutual funds, then it’s a good time to sell. At this point, you’ll want to park your assets in an individual bond portfolio.

A good rule of thumb is – if your original plan was to hold onto your bonds until they mature and can be used for later expenses, just stick with that initial plan. Keep in mind too, that if you don’t, there may be a possibility of taking a loss due to something that is termed an “interest rate risk”. This occurs when your bonds decline in value, due to a rise in interest rates.

Another consideration is that a greater change in bond value is usually tied to the length of that bond’s maturity. But, if you hold on to an individual bond, until it matures, then they will slowly but surely return their value as they mature. Also, once the bonds reach maturity, a full principal amount will be paid to you. This is in contrast to bond funds which, unlike individual bonds, don’t have a maturity period. This can lead to a possible decline in value during a rate increase cycle.

Incorporating a Bond Ladder

It should be noted that financial experts have suggested using a Bond Ladder when it comes to retirement savings planning, should you be working with a fixed-income investment. This can be advantageous during QE (Quantitative Easing) and ZIRP (Zero Interest Rate Policy) years.

Bond Ladder strategy involves allocating a section (fixed-income) of your portfolio to be invested in bonds that are long-, intermediate- and short-term. This will generate a current income, while providing a reduction in rising interest rates effects, when it comes to the portion of your portfolio that is designated as fixed-income. If you don’t have a bond ladder, there’s nothing stopping you from building one.

Here, we’re advising you that any dedicated individual bonds portfolio strategies should be in keeping with your expected available liquidity “requirements”. This means that you will want to have a plan that takes both cash inflow and outflow estimations into consideration. As you would imagine, a correctly designed Dedicated Portfolio can be considered a highly effective risk-management tool that can protect your investments from changes in the interest rate.

 

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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