Climbing the Bond Ladder

 Having a well balanced, diversified portfolio is essential for a successful investment strategy.  Knowing effective money management techniques allow you to make the best decisions regarding how you spend or save your money in order to reach both short term and long term goals.  Having both a diversified investment portfolio, and strong money management techniques are what separate successful investors from lucky investors.  (Luck is always welcomed by investors, however, in order to consistently experience success with your investments, you want to have techniques that have been proven successful rather than the chance of getting lucky!)

One investment strategy that some very successful investors use is called the "bond ladder".  While many investors don't use it or understand it, the investment method is relatively simple and helps investors minimize risks.

What is a Bond Ladder?

The bond ladder is an investment strategy that focuses on fixed-income securities and minimizing their risks, while managing the daily cash flow of the investor. A bond ladder makes an effort to meet the demand for cash with cash flows by diversifying investments with a mixture of bonds within an investment portfolio.  Instead of rolling over all of an investor's maturing bonds into fixed-income solutions all at the same time, the risk of reinvestment is reduced by managing the flow of the money throughout the year, with a steady flow of cash.

 With a bond ladder investment strategy, an investor has a portfolio consisting of bonds that have different maturity dates.  The trick is to invest in various bonds that mature at different times, and each bond is a "rung" on your bond ladder.  If you were to purchase 10 bonds with a face value of $3,000 each, you would want to make sure their maturity dates were spread out so that one may mature in one year, another three years after that, two or three bonds could mature in five years, with the remaining bonds maturing seven years down the line.  You move up your "bond ladder" each time a bond in your portfolio reaches maturity.

Purpose of Using a Bond Ladder

When you have a portfolio of bonds with different maturity dates, you aren't locked into a single bond for a long period of time.  If the bond market became a bull and bear market, and you were locked into a single bond with a yield of 4% for 10 years, then you would not be able to take advantage of increasing (or decreasing) interest.

A bull and bear market is the term used to describe the increase and decrease of the bond market.  A bull attacks it's opponenets by thrusting horns up into the air, and represents an increase in the bond market.  A bear attacks it's opponents by swiping their paws down at them, and represents a decrease in the bond market.

Having bonds maturing every year or so means you aren't as effected by fluctuations in the bond market and is a good way to diversify your investment portfolio- especially if you are a conservative investor that has an investment portfolio largely made up of bonds.