This week we are stepping away from the financial intricacies of stocks and contemplating another investment technique; the bond ladder.  Perhaps you have heard the term, and pictured a lovely climbing stool held up by piles of cash, or, like many, really didn’t know what to think.  Bond ladders are useful investment tools if you are looking for an income stream while maintaining your principle (with risks). 

Bonds are different from stocks in that when you purchase a bond, you are purchasing some of that companies’ debt.  By selling you the bond, they are agreeing to honor their debt.  You agree to hold it for a certain period of time, during which you receive interest, and at the end of which, you receive your principle (hopefully).  Stocks are less tangible, they indicate a belief that the company will continue to grow and make profits.  Bonds are sold in units of 1000, one bond is generally $1,000.00, and most bonds cannot be purchased in smaller amounts than 5 or 10 (so you need $5,000-$10,000 as a minimum investment).  In the event that a company goes bankrupt, bondholders will be paid first, common stock holders last.  Because bonds are then considered less risky, they are also considered to have lower profitability. 

Bonds have coupons, or semi-annual interest payments, made to the bearer of the bond.  Generally, if a bond pays in March, it will also pay in September (every six months).  If you would like to have income in more than March and September, it is necessary to find bonds paying in other months; May/Nov, Jan/July for example.  You are now up to three bonds, and receiving income every other month.  Financial markets are not always stable places.  Bond rates fluxuate along with the market and treasury rates.  If you were to get into the market one year, when bonds were paying 7%, and all of you bonds “came due” at once, you may be stuck buying back in at 2.5% for a similar quality bond.  That can have a huge affect on your lifestyle.  For that reason, it is recommended that you “ladder” your bonds out many years.  You may choose to have a bond come due every other year for ten years.  This would be a minimum of five bonds.  In order to spread the risk of company performance, and maybe to have monthly payments, you could include six-ten bonds.  That way if you had one come due in the market like last year, your financial advisor may suggest you hold it as cash until interest rates improved, and higher-coupon bonds became more readily available. 

This is just touching the surface of true bond-laddering, so if you want to learn more, as always, consult a financial professional.  Many may steer you towards a bond fund, if you have less to invest, and want to put some of your money into less volatile investments.  They may also be more comfortable with the bond funds, which generally have management fees, but may have projected retirement dates, so that more aggressive investments are included until you get closer to retirement.