Not really. Bonds trade to a yield. If, for a given quality and duration bond, the prevailing yield is X%, bonds paying less than X% and bonds paying more than X% will trade roughly to that prevailing yield. The major difference is that with bonds paying interest above X%, all the yield will come in the form of interest minus some capital loss when held to maturity, while bonds paying interest below X% will have their yield come partially from interest and partially from a capital gain when held to maturity. But in a rational market, their total return will be nearly identical.
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I took advantage of the very strong stock market in 2020 and 2021 to lift my bond ladder to 7 years. I held it at 7 throughout 2022, but due to inflation eating through more than our available investable cash, I elected to prioritize a mortgage payoff to free up future cash flows as a 2023 priority. See this article for details: These Are My 5 Highest-Conviction Stock Market Moves for 2023 | The Motley Fool . As a result, unless the market delivers a strong recovery in 2023, I expect that our bond ladder will shrink in 2023. It should still be above the five year target, though.
Because most bonds pay interest and many stocks pay dividends. In addition, in a rising or recently risen rate environment, many previously issued bonds can be bought at a discount to par/maturity value. If the priority use of those dividend and interest payments is to maintain the bond ladder (particularly if it’s below its target length), it’s often straightforward to claw back a bit of length on the bond ladder without having to directly sell stocks.
Absolutely! And had I not set up my bond ladder before you first pointed those out to me, I might very well have used them in my initial setup.
I agree. The potential misconnect is that there are folks who operate with an “investing = stocks” framework. In those cases, the cash buffer is in lieu of bonds. We can discuss whether bonds or cash is smarter, but that’s a much less meaningful difference than “you need something safer than stocks if you expect to pull money from your portfolio.”
Regards,
-Chuck
Home Fool
Whatever works for you is fine, but personally this sounds like the worst advice ever.
“I’m charting a straight line course between Madrid and New York”
“But Captain, there’s a hurricane right in the way.”
“I don’t care, I’ve made my plan and I’m going to follow it.”
Investing, like driving the supermarket, raising kids, or deciding on a career is a journey filled with variables. It may be raining or sleeting, the child may need extra help, or perhaps excels in music, etc. The market is wonky, and changes over time. We’ve been fortunate the be in a bull market for the past 15 years, and for the decade before ‘08, but there have been times when the market has been flat for more than a decade at a time. There are times of turbulence and of calm, of technological breakthrough and of stagnation. It seems to me that the best plan is to be flexible and adjust, adjust, adjust.
If not, what are all those high priced analysts at Goldman doing? Heck, even Warren Buffett isn’t doing “set and forget” investing.
You keep saying that. I guess for some people it is, but it’s certainly not impossible. Again, it’s not purely mechanical, but the market keeps presenting opportunities and/or for some wide ETF’s, seems overvalued. To each his own, I guess.
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