How laddering helps bond investors

July 4, 2008

I've heard that laddering can help protect a bond portfolio, but I'm not sure what the strategy is or what it accomplishes. Does it make the portfolio less susceptible to defaults?

I've heard that laddering can help protect a bond portfolio, but I'm not sure what the strategy is or what it accomplishes. Does it make the portfolio less susceptible to defaults?

No. Laddering-investing roughly equal amounts in bonds of different maturities-reduces a portfolio's overall potential for losses due to changing interest rates. A portfolio composed of all long-term issues faces the most interest rate risk, since prices of such issues drop the most when rates rise. A laddered portfolio also doesn't tie an investor's hands as much as one containing all long-term issues. That's because the bonds with shorter terms mature periodically, providing the option to use that cash for other purposes if necessary or to reinvest it in other bonds of similar maturity. Reinvesting at different points in the interest rate cycle can improve your overall return over time, since you don't risk having to reinvest all your cash during a down cycle for bonds.