Fixed Income - Laddered Portfolios

Investors make use of fixed income securities to achieve a number of different objectives. By incorporating debt securities into a portfolio, the investor aims to achieve one or more of the following:

  • Investment Income
  • Safety of Capital
  • Consistency of Returns
  • Diversification

The laddered portfolio approach is a passive investment strategy. Laddering involves building a portfolio of several fixed income securities, with staggered maturities, resulting in a portion of the portfolio set to mature at regular intervals. Each position in the portfolio is approximately the same size as the next.

To maintain the ladder, as debt securities mature, the matured amount is re-invested at the long end of the ladder often at higher interest rates, given the normal shape of the yield curve to extend the ladder to the original term. Over time, the portfolio will eventually include only debt instruments that were originally purchased at the longest allowable maturity date, resulting in a higher average yield and income for the investor. Purchases will be made in all interest rate cycles, regardless of expectations, with the idea that over time this will even out overall returns/yields.

The bond ladder provides flexibility as a portion of the proceeds come due each year, while smoothing the volatility of the income stream. At any given time, the current yield of the portfolio is the average of all the bonds in the portfolio. So bonds purchased in periods of high interest rates are combined with those purchased in periods of low rates, providing a smooth income stream over time.

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