Fixed Income
Bonds
We believe bonds are a very important part of most investor’s portfolio. It is the portion of the portfolio that provides stability, safety, and flexibility. For the vast majority of individual investors managing a bond portfolio is a straightforward process. It involves creating a portfolio structure commonly known as a bond ladder. As illustrated below, a bond ladder is a group of investment grade quality fixed income instruments of progressively higher maturity dates.
A bond ladder strategy can provide a number of important benefits:
- Shelter Shelter from fluctuation in interest rates By having some securities in short dated instruments, and others in longer dated ones, the overall value of the fixed income portfolio is partially sheltered from changes in interest rates.
- Safety and flexibility In general, short dated instruments are usually lower in yield, but more liquid than longer dated bonds. These shorter dated securities can be readily sold in the secondary market. This allows an investor to raise cash during times of emergency or need.
- Tax efficiency A bond ladder allows the investor to buy and sell individual securities in a tax efficient manner.
- Low expenses A fixed income bond ladder is a very cost-effective way to invest.
When selecting a bond investment, many investors make the mistake of taking on excessive risk in an attempt to get a better yield. This strategy offsets the inherent safety of bonds, and may expose this portion of the portfolio to excessive risk. Often times we will use open and/or closed end mutual funds when investing in less liquid or riskier fixed income securities.
William S. Paddor is an investment advisor representative of Vanderbilt Advisory Services. Arlington Financial Services and Vanderbilt Financial Group are separate and unaffiliated entities. Vanderbilt Financial Group is the marketing name for Vanderbilt Advisory Services and its affiliates. Advisory Services offered through Vanderbilt Advisory Services For additional information on services, disclosures, fees, and conflicts of interest, please visit www.vanderbiltfg.com/disclosures