|
There is a saying that bondholders like recessions and love depressions. Although this probably overstates the case, it illustrates a fundamental aspect of bond investing: Bond values have an inverse relationship with interest rates.
So, what do bondholders do to weather market fluctuations, which are inevitable? One useful strategy for bond investing is a bond ladder. Start Climbing A bond ladder is a method of bond investing whereby the investor purchases bonds with varying maturity dates. For example, you might invest $25,000 in five $5,000 bonds that mature in two, four, six, eight, and ten years. When the first bond expires, you could use the money to purchase another ten–year bond to keep the ladder going. If interest rates rise after you set up the ladder, a portion of your investment would become available within two years for reinvestment at the higher rate. If interest rates fall, the majority of your investment would continue to earn yesterday's higher rates; only $5,000 would have to be reinvested at a lower yield. The principal value of bonds will fluctuate with changes in market conditions. If sold prior to maturity, bonds may be worth more or less than their original cost. Depending on the types and amount of securities within it, a bond ladder may not ensure adequate diversification of an investment portfolio. You should carefully evaluate whether a bond ladder and the securities within it are consistent with your investment objectives, risk tolerance, and financial circumstances. When attempting to climb to economic success, it may help to bring a ladder. Call today for more information on investing in bonds.
A Ladder to Success
|
