https://www.fidelity.com/viewpoints/investing-ideas/bond-ladder-strategy?ccsource=email_weekly_0126WM_Eligible
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People who are retired or are nearing retirement likely want reliable income to meet their needs. While some people may have pensions to supplement Social Security payments, most must rely on investments to deliver additional income to cover expenses.
Over the past decade, investors facing super-low interest rates on bonds, certificates of deposit (CDs), and cash have turned to stocks. But recent painful declines after a long bull run have many people looking for less risky options. The good news: Yields on high-quality bonds and CDs have risen to a point where they can deliver returns that are comparable to those of stocks but with far more predictability and less risk.
If you want to generate retirement income while also preserving the size of your portfolio, building a ladder of individual bonds could offer reliable income as well as peace of mind well into the future.
A popular way to hold individual bonds is by building a portfolio of bonds with various maturities: This is called a bond ladder. Ladders can help create predictable streams of income, reduce exposure to volatile stocks, and manage some potential risks from changing interest rates.
The Federal Reserve is expected to continue raising interest rates until it decides inflation has been brought under control but could stop raising and potentially even lower rates if the economy weakens. A ladder may be useful when yields and interest rates are increasing because it regularly frees up part of your portfolio so you can take advantage of new, higher rates in the future. At the same time, if and when rates begin to fall, a bond ladder structure will ensure that at least part of your bond portfolio is maintained at the (higher) yields that prevailed when you had originally invested in the ladder. If all your money is invested in bonds that mature on the same date, they might mature before rates rise or after they have begun to fall, limiting your options.
By contrast, bonds in a ladder mature at various times in the future, which enables you to reinvest money at various times and in various ways, depending on where opportunities may exist. Ladders can also offer some protection from the possibility that rising rates might cause bond prices to fall, since bond holders are paid the full principal value of the bond when it matures (assuming the issuer stays in business and can make good on its borrowing as they come due).
"Laddering bonds may be appealing because it may help you to manage interest-rate risk, and to make ongoing reinvestment decisions over time, giving you the flexibility in how you invest in different credit and interest rate environments," says Richard Carter, Fidelity vice president of fixed income products and services. (Note that the chart that follows is for illustrative purposes only and that yield rates are subject to changing market conditions.)
