These Ladders Aren't from Home Depot

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Home Depot sells ladders.

But does your personal investment strategy contain one?

The ones we’re talking about aren’t for climbing - they’re for earning money.

Ladders may not make you millions, but they are a steady, reliable way to earn income over time.

How do they work? Why should I consider them? Why now? That last question might be one of the most important, as today’s rate environment may make the perfect set-up for you to consider a ladder.

Understanding Bond Ladders

A bond ladder is a portfolio of fixed-income securities in which each rung represents a bond that matures at a different time. This staggered approach allows investors to reinvest the proceeds from maturing bonds at regular intervals, potentially capturing higher yields if interest rates rise, while also providing periodic liquidity and reducing the risk of reinvesting a large sum at once.

The Benefits of a Bond Ladder

1. Diversification: A bond ladder spreads out interest rate risk and credit risk over various maturities and issuers. As a fixed-income investment, this also provides diversification away from stocks within a portfolio.

2. Income Stability: It provides a predictable income stream, as bonds mature at different times and their proceeds can be reinvested or used as needed.

3. Flexibility: Investors can adjust their ladder to align with changing financial goals or interest rate environments.

4. Rate Fluctuation Management: In a rising rate environment, maturing bonds can be reinvested at higher rates, potentially increasing the ladder’s overall yield.

Notice how the above states the benefits of a ladder during a rising rate environment. Well, the Federal Reserve has made it quite clear they are holding rates steady at the moment, with the consideration of lower rates in the future.

So why should one consider a bond or CD ladder when rates are expected to head lower?

Current Economic Landscape

At present, interest rates are high. The average rate for a 30-year fixed mortgage is currently 7.36%, a significant increase from previous years. This rise in rates is reflective of broader economic trends and the Federal Reserve’s efforts to manage inflation. Despite recent hikes, the anticipation of rate cuts by the Federal Reserve could signal a strategic opportunity for bond ladder enthusiasts.

Why Bond Ladders Now?

When rates are high, as they are now, locking in yields with a series of bonds can secure a steady income stream. Should rates decrease, the existing bonds in the ladder will continue to pay out at the higher rates at which they were purchased, outperforming new bonds issued at lower yields.

This scenario can offer a cushion against the erosion of purchasing power due to inflation, which has been a persistent concern despite the Fed’s efforts to maintain a 2% inflation target.

Bond ladders can be a good way for those seeking to capitalize on the current high-interest rate environment. With the Federal Reserve signaling a shift towards lower rates, now is a prime time to lock in higher yields that will continue to benefit investors even as the rate landscape changes.

Firms like Wealthfront are currently offering managed bond ladders, where you supply the capital and they do all the heavy lifting. These can bea good fit for those who want the exposure, but not all the work.

By offering diversification, income stability, flexibility, and a hedge against rate fluctuations, bond ladders stand out as a compelling choice for the informed investor.

And now you know that ladders aren’t just for changing overhead light bulbs.

Save On,

Chris