Employing Best Practices in Building Bond Portfolios
The world of bonds may seem like a simple place, compared to equities and alternative assets, but it's actually a very complicated asset class. Consider that it includes government bonds, corporate bonds, municipal bonds, high-yield bonds (corporate and municipal), and cash management, as well as the whole other world of foreign sovereign and corporate bonds and Yankee bonds.
Let's look at some of the best practices associated with successfully navigating the world of fixed-income securities.
Building Laddered Bond Portfolios
Because bonds deliver relatively little in the way of return, and are used by investors mainly to produce income and to control portfolio risk, one way to keep bond management costs down is to ladder our fixed-income portfolios. If, for example, we want to build a $1 million bond portfolio with an average maturity of five years, we might simply buy the following bonds:
| Dollar Amount | Maturity | |
| Bond #1 | $100,000 | 2012 |
| Bond #2 | $100,000 | 2013 |
| Bond #3 | $100,000 | 2014 |
| Bond #4 | $100,000 | 2015 |
| Bond #5 | $100,000 | 2016 |
| Bond #6 | $100,000 | 2017 |
| Bond #7 | $100,000 | 2018 |
| Bond #8 | $100,000 | 2019 |
| Bond #9 | $100,000 | 2020 |
| Bond #10 | $100,000 | 2021 |
This gives us a $1 million bond portfolio with an average maturity of five years. Each year, one of our bonds will mature and we will use those proceeds to buy the longest maturity needed to maintain our five-year average maturity. (In 2012, for example, we will use the proceeds ...
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