Hi my friend. I can’t give individual investing advice. That said, I’m happy to walk through some of the basics of bond laddering.
First, get a sense for how much money you expect the bond ladder to generate each year. If this is for retirement income, you’ll probably want to add an estimate for inflation on top of the cash flows. For instance, if you want $60,000 per year from the bond ladder and expect a 4% inflation rate, you’ll want your bonds that mature 1 year from now to generate $62,400 at maturity, your bonds that mature 2 years from now to generate $64,896 at maturity, etc.
Next, get a sense for how frequently you want the cash to come in. Is $60,000 once a year sufficient? Do you need to see it as $15,000 a quarter? $5,000 per month?
With those mechanics in hand, the next step is to understand the risk tolerance you’re willing to accept in your bond ladder. My personal risk tolerance is investment grade corporates, with screening to assure diversification among issuers and sense checks to look for obvious cases where a bond is investment grade only because the ratings agencies haven’t had a chance to downgrade it yet.
Then, it becomes a matter of buying the bonds. Perhaps the simplest approach – if you can deal with annual maturities – is Invesco’s BulletShares ETFs, https://www.invesco.com/bulletshares/tools/bond-ladder . They have ETFs consisting of bonds that mature in a given year, depending on the specific ETF.
Alternatively, most brokers will have access to a “bond desk”. You may have to use the broker’s desktop browser interface instead of a mobile app or mobile web browser in order to access it. You can then use that interface to screen for and buy bonds that meet your criteria. E*Trade even has a bond ladder builder where you can screen for multiple maturities at once, to simplify the process. I don’t know if other brokers do as well.
After the initial setup, managing a bond ladder is fairly straightforward. If all goes well, the bonds pay timely interest and principal at maturity. If you want to maintain your bond ladder’s length, you buy new bonds one rung beyond the farthest-out maturity of your longest bond, roughly on the timing of when each rung matures. You would likely use cash from interest, dividends, or selling other assets to do so. If you’re not actively spending the bond principal when it matures, you can even plow that back into the ladder as well.
If things do not go well, you will have to deal with default. Diversification, only buying investment-grade bonds, not counting on the interest for immediate spending purposes, and maintaining a cash emergency fund are key tools I use to help protect against the worst outcomes for any given issuer. It’s not foolproof, but thus far, it seems to be holding up.
E*Trade does include a screener for TIPS. i would presume other brokers with bond desks do as well.
Sure – but then that money is not invested the bond ladder, it’s invested in a money market fund.
A key mindset shift is that with typical bonds, the issuer has a contracted payment schedule and maturity date. The number one question you as an investor need to figure out is “how likely will this issuer be able to keep its commitments throughout the expected life of the bond?”
Unless you’re venturing into the high-risk world of busted convertible bonds or issuers in or on the verge of default (in which case you should probably consider your efforts bond speculating rather than a bond ladder), you’re not looking to hit a home run. Instead, you’re looking for an investment that will give you $X on Y date, likely along with regular interest payments along the way.
Within that framework, bond investing can be simpler than stock investing. Indeed, most bond screener tools will share two numbers for any given bond with fixed coupon payments: “Yield to Maturity” and “Yield to Worst”. “Yield to Maturity” tells you a rough estimate of your anticipated pre-tax ROI if the bond pays exactly as expected between now and its maturity date. “Yield to Worst” tells you a rough estimate of your anticipated pre-tax ROI if the bond pays exactly as expected between now and its next available call date. (A call date is a date when the issuer can buy the bond back before maturity, usually at full face value. Not all bonds are early callable, but some are.)
Once you’re satisfied with your screens, buying the next bond in a bond ladder can be as easy as running your screen, sorting by decreasing “yield to worst”, and then going down the list until you find one that also fits the criteria you can’t easily screen for. (An example: If I already own a bunch of bonds by the same issuer that pops to the top of a list, I’ll skip it. In my mind, the improved diversification is worth more to me than the extra 0.1% or so of annual potential returns, given the larger impact to my portfolio of default should that issuer be unable to pay.)
Regards,
-Chuck