Bond Ladder: How It Works, Rules & Example
A bond ladder spreads your money across bonds or CDs that mature at different times, like rungs on a ladder. As each rung matures, you get cash back to spend or reinvest at current rates.
How it works
- Decide how much money to ladder and over how many years, such as five years.
- Split the money evenly across bonds or CDs maturing in each year.
- Hold each bond to maturity to receive its face value back, assuming no default.
- When the shortest rung matures, reinvest it at the far end of the ladder or use the cash.
- Stick to high-quality issuers to reduce default risk.
The rules
π Pros
- Predictable cash flow at regular intervals.
- Reduces the risk of locking all money in at one interest rate.
- Holding to maturity avoids needing to sell when prices are down.
- Easy to match maturities with planned expenses.
π Cons
- Returns may lag stocks over long periods.
- Fixed payments can lose purchasing power to inflation.
- Selling a bond before maturity may mean taking a loss.
Worked example
Common mistakes
- Buying low-quality, high-yield bonds just for a bigger payout.
- Putting everything into one maturity.
- Ignoring early withdrawal penalties on CDs.
Tools for this strategy
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Can I build a ladder with CDs instead of bonds?
Yes. CD ladders follow the same idea and are common for savers.
What happens if rates rise?
Each maturing rung can be reinvested at the higher rate, which is one benefit of laddering.
Is a bond ladder risk-free?
No. Issuers can default and inflation can reduce real returns, though high-quality ladders are relatively low risk.
Similar strategies
Dollar-Cost Averaging
Dollar-cost averaging means investing the same amount of money on a regular schedule, no matter what the market is doing. It takes the guesswork out of timing and turns investing into a calm, repeatable habit.
π§ΊBuy and Hold Index Investing
Buy and hold index investing means owning low-cost funds that track a whole market and keeping them for the long run. Instead of hunting for winners, you own a slice of everything and let broad economic growth do the heavy lifting.
βοΈThe 60/40 Portfolio
The 60/40 portfolio holds about 60% in stocks for growth and 40% in bonds for stability. It is a classic balanced approach designed to smooth the ride while still aiming for long-term growth.