WHAT IS A LADDERED BOND PORTFOLIO?
A laddered bond portfolio is an investment technique that acquires individual bonds that mature on different dates. By combining short- and longer-term bonds in the portfolio, under somewhat normal market conditions the laddered portfolio is expected to provide higher yields than a portfolio consisting of only cash-like instruments or very short-term bonds over the long-term. Often this structure will have a bond maturing every 6 or 12-months in anticipation of projected cashflow needs. When a bond matures, the investor receives the par value of the bond. This greatly reduces the volatility of the amount expected on the anticipated date. This type of portfolio can serve a specific objective for retirees or near retirees who would like to lock in specific dollar amounts to cover known retirement expense needs for the next 5, 7 or even 10 years depending on their cash flow needs, risk tolerance and return expectations.
We typically use the laddered bond structure for investors who can’t, don’t want, or need to accept near term investment risks. The laddered bond investment technique works well for a client who wants to know their core retirement expenses are covered for the next several years while receiving interest on this otherwise idle cash. When this laddered technique is used, the assets needed to cover longer term retirement expenses (beyond the laddered period) are partitioned from known shorter-term withdrawals. This segments the client’s investment time horizon into two components. The non-laddered portion of the portfolio (return seeking) can now accept more longer-term investment risk, which is expected to be less risky over longer time-periods. During years where the return seeking segment of the portfolio is doing well, some of this appreciation is taken off the table in a tax-sensitive manner and used to fund the highest rung of the laddered portfolio. During periods of market downturns, no redemptions from the return seeking component are taken. This allows the client to avoid selling securities in a down market. This investment technique better positions the client to continue its subscription to the “buy low, sell high” market theory.
Laddered bond portfolios can be optimized when constructed based on an investor’s specific cashflow needs, investment objectives, risk tolerance, investment time horizon(s) and tax sensitivity. Before any investment is made, each investor needs to thoroughly understand their own situation or seek the help of an investment advisor who has the investment experience and who will take the time required to tailor your portfolio to your specific situation.
