Passive Income Vol. 4: Bond Ladders

Want to setup a predictable stream of income for the next 10 years? Contact me to discuss building a bond ladder.

Bond ladders are a series of fixed income investments with different maturity dates. Over time you will receive interest payments, usually semi-annually, as well as your initial investment at maturity.

How to build a bond ladder.

Some advantages of bond ladders:

1) Passive income: Using high quality bonds should minimize the need to monitor the positions.

2) Greater diversification: Use a variety of different borrowers to lower your concentration risk.

3) Lower reinvestment risk: When each bond matures, you will need to reinvest that money into a new investment. But only a small portion of the ladder will mature in a given year.

Some disadvantages of bond ladders:

1) Opportunity cost: Bonds have a lower expected return than equities over a long period of time. Bond ladders should be a complement to, not a replacement for, a well diversified portfolio.

2) Limited liquidity: Selling individual bonds can be difficult for retail investors. Be sure that you have enough liquidity in the other components of your portfolio that you don’t need to sell the bonds before their maturity date.

3) High net worth strategy: Retail investors would need substantial assets to ensure that the individual bonds in the ladder are a small proportion of their overall portfolio.

***The graphic above is for illustrative purposes only, and does not constitute financial advice. Be sure to consult an investment professional before purchasing any investments.***