|
|
 |
|
| Risk & Reward |
Rung Out
Harvey D. Shapiro
07/01/2004
|
With short-term interest rates barely keeping pace with inflation and
long-term rates trending up, those of us who want to allocate part of our
portfolios to the bond market have few attractive options. If we invest in
short-term bills and notes, our returns are will be meager. But if we invest in
medium- and long-term notes and bonds, we may suffer capital losses as interest
rates rise.
 One solution is to invest in both—or, more accurately, to
allocate our capital among bonds with a number of different maturities. For
those of us who are wary of active bond portfolio managers and do not want to
pay their fees, this passive strategy, called a laddered bond portfolio, may
make sense.
Laddering gives us exposure to the highest yields available, yet
it minimizes the risk of capital loss, and it provides some degree of liquidity.
“[In a laddered strategy,] you purchase a series of bonds so that
periodically—on an annual or biannual basis—you always have a segment of your
portfolio coming due,” explains Zane Brown, who oversees some
$20 billion in
bonds as a partner and director of fixed income at the Jersey City, N.J.-based
investment firm Lord, Abbett and Co. According to Brown, to ladder our bond
investments over a 10-year period, for example, we would divide the amount to be
invested into 10 equal portions, and then purchase bonds maturing in each of the
10 years. As bonds mature, we automatically replace them with new 10-year bonds,
and keep climbing the ladder year after year.
|
|
|
|
|
|
|
