Ladder Strategy
A very conservative approach to portfolio structure is called "Ladder strategy". It involves dividing your money among bonds with different maturities, primarily short to intermediate to long.
Longer duration bonds typically yield more than short-duration bonds to compensate investors for tying up their money longer.
You might buy for example, a three-year bond, a five-year bond, a ten-year bond, a thirty-year bond. You would put approximately equal amount of money in each bond. As each bond matures, you would replace it with a bond equal to the longest maturity in your portfolio.
By doing that, the average maturity of such a portfolio is about half of the longest maturity.
The ladder strategy protects you against a variety of risks:
- Keeping average maturity of the portfolio short to intermediate protects the principal value of the portfolio against interest rate risk.
- Holding your bonds until maturity will be redeemed at par. If interest rate goes up, you will be investing maturing bonds at high rates and you will thereby boost total return.
Longer duration bonds typically yield more than short-duration bonds to compensate investors for tying up their money longer.
You might buy for example, a three-year bond, a five-year bond, a ten-year bond, a thirty-year bond. You would put approximately equal amount of money in each bond. As each bond matures, you would replace it with a bond equal to the longest maturity in your portfolio.
By doing that, the average maturity of such a portfolio is about half of the longest maturity.
The ladder strategy protects you against a variety of risks:
- Keeping average maturity of the portfolio short to intermediate protects the principal value of the portfolio against interest rate risk.
- Holding your bonds until maturity will be redeemed at par. If interest rate goes up, you will be investing maturing bonds at high rates and you will thereby boost total return.
Comments
Post a Comment