Municipal Bond Forum
Trying to avoid laddering
Q
I will soon have a large amount of money that I’m going to invest in bonds and was considering laddering. Even though your articles make sense, what if I invested all the funds into a long-term bond when interest rates were at their lowest?
A
James A. Klotz responds:
Interest rates are cyclical. By maximizing your income you will be able to weather a period of higher rates (which is always followed by lower rates). Most laddering strategies, with the longest maturity being 10 years, sacrifice 25% to 40% of the income available on longer-term bonds.
Timing the interest rate markets can be treacherous. Investors who have employed this laddering strategy over the last 20 years have continually been forced to reinvest their maturing bonds at lower rates.
The additional income produced by long-term bonds allows reinvestment at the higher rates if they do come about.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.