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Build a bond ladder to secure a low-risk, regular income

by , 14 July 2014

Bonds come with a lower risk factor than investing in shares. If you like the idea of taking on less risk and receiving a regular income, bonds could be perfect for you.

But bonds are sensitive to interest rates. They perform in the opposite direction to rates. So you need a strategy to help you overcome this. And that's where a bond ladder comes in.

So how can you build one? Read on to find out…

How to build a bond ladder in three steps

A bond ladder involves buying bonds of varying maturities. (You can read more about how bond ladders work here.) This will help you smooth out the effects of changes to interest rates.

Here’s how to build one…

Step 1: How long do you want your ladder to last?
As a general rule of thumb, the longer you invest in bonds, the more income you’ll generate over the years. This is down to interest rates usually rising over time.

Step 2: How many rungs do you want your ladder to have?
How often do you want your bonds to mature? The more rungs you have, the more bonds you’ll have. And more bonds mean a more diversified portfolio.

Step 3: What bonds will you include in your ladder?
You could only buy government bonds or you could look to include some corporate bonds. Another option is to include fixed-term savings accounts.

The problems with building a bond ladder

It all sounds very simple, but actually buying the bonds can be a different story. You might struggle to buy the bonds with the maturities you want. But you could try and overcome this by looking to fixed-term savings accounts.

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There’s also the issue of buying the bonds themselves. Unless you buy at first issue (at par value), you can gain or lose when the bond matures. And if you need to liquidate your portfolio, you’ll incur further losses.

Your portfolio also needs to be pretty large to diversify enough. And you need to take into account the commissions and price changes in bonds too.

So there you have it, how to build a bond ladder to secure a low-risk, regular income.

Build a bond ladder to secure a low-risk, regular income
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