Investing in Ladders, a Defense Against Risk

I teach you things about making money in the financial markets that the big corporations don't want you to know about. I stand for financial justice and I can back that statement up with my own portfolio.

To Satisfy the People Who Want Me to Fail

Recently, I was giving a lecture on investing in bonds to a small group of people. Usually when I do that I get at least one person who wants to know about my failures. They just want to show people that I don’t know what I am talking about.

I have three bond accounts. I have one where I gamble in the junkiest of bonds, another I buy bonds that do not trade, and the largest account is my IRA.  For people who need to know about my failures, I talk about my gambling account. Over the past 5 years, I lost 60% of my investment. As you see, it does not pay to gamble. This account was created in 1983 to pass money to my grandchildren through my great great grandchildren, 100 years from now. So I can afford to gamble with that money. 

My bonds that I have that do not trade give high yields. I use that money to help finance the following years IRA Contribution.  

How have I Done Since 2009?

Now that we have the anti-success people out of the way, we can focus on what you have to do to be successful in corporate bond investing. After making my IRA contribution to my account, I buy my bond investments.

Since January 30, 2009, my account has increased in value 230.914%. That means that since January 30, 2009, my account has increased 5.248% per month or 0.1749% per day. From January 1, 2012 to Oct. 10, 2012, my IRA account increased in value 18.234%. That means so far this year, my IRA account has increased 1.8234% per month or 0.45585% per week. Most bank savings accounts are giving 0.45585% in a year. “Year to Date,” to Oct. 10, 2012, the Dow increased by 9.656%. From January 30, 2009, the Dow increased 68.401% or 1.555% per month. So I have continued to beat the Dow for the past 3 years. Some of you have been watching me beat the Dow since I started blogging in 2009. Experts will tell you that I cannot do that.

For the people who are in my Greedy Friends Investment Club, you have been educated in what you must do to buy corporate bonds. Now we are going to talk about managing your account over a 10 year period.

 

Using Ladders to Defend Against Risk

When portfolio managers talk about strategies for success, they will often refer to risk diversification and money management. These strategies separate those investors who are successful because of knowledge and skill from those who are merely lucky. Now, don't be mistaken, luck isn't a bad thing to have, but possessing foundational skills will ultimately lead to success. We are going to discuss the bond ladder strategy, a bond investing strategy that is based on a relatively simple concept that many investors (and professionals) fail to use or even understand.

A bond ladder is a strategy that attempts to minimize risks (inflation, interest rate, and business risks) associated with fixed-income securities while managing cash flows for the individual investor. Specifically, a bond ladder, which attempts to match cash flows with the demand for cash, is a multi-maturity investment strategy that diversifies bond holdings within a portfolio. It reduces the reinvestment risk associated with rolling over maturing bonds into similar fixed-income products all at once. It also helps manage the flow of money, ensuring a steady stream of cash flows throughout the year.



There are two main reasons to use the ladder approach. First, by staggering the maturity dates, you won't be locked into one particular bond for a long duration. A big problem with locking yourself into a bond for a long period of time is that you can't protect yourself from bull and bear bond markets. For example, if you invested your full $40,000 into one single bond with a yield of 5% for a term of 10 years, you wouldn't be able to capitalize on increasing or decreasing interest rates.



The second reason for using a bond ladder is that it provides investors with the ability to adjust cash flows according to their financial situation. For instance, going back to the $40,000 investment, you can guarantee a monthly income based upon the coupon payments from the laddered bonds by picking ones with different coupon dates.

This is important for people who want to build your IRA or any other account where you want to reinvest the interest into more bonds that will give more interest. By doing this, investors compound their interest every year.  

This is important for retired individuals because they depend on the cash flows from investments as a source of income. If you are not dependent on the income, by having steadily maturing bonds, you will have access to relatively liquid money. If you suddenly lose your job or unexpected expenses arise, then you will have a steady source of funds to use as required.
 

How Have I Used Ladders in my IRA?

I try to invest in bonds that are Standard and Poor’s BBB+ to BB-. I break my own rules. I have bonds in my IRA that range from BBB+ to CCC. Some bonds are not rated. One issue is in bankruptcy. This means that my IRA Portfolio is riskier (Business Risk) than the safest  junk bond Portfolio. 

2011(1)		0.00%

 Before the World Wide Web, I had to depend on my broker to give me a list of bonds that they had in their inventory. Since it was not in their interest to give me bonds that could give high interest and safety, they gave me access to bonds that were just staying ahead of bankruptcy. A&P was one such bond. In my IRA I had $2,000 worth and now they are worth $2.50. Here is the reason why I tell you not to use full brokerage firms. Use online firms with large Corporate Bond inventories.   

2012(1)

0.82%

I have one bond that will mature in 2012 and it is .82% of my portfolio. This bond will be reinvested with my 2013 contribution, probably in bonds that mature in the early 2020s.

2013(1)

26.97%

In 2013, I will have one oil bond issue coming due. This issue is 26.97% of my portfolio and gives very high interest. I bought it at the bottom of the stock and bond market crash. They give interest of about 36%. This money will be reinvested in several different bond issues in the med 2020s.

2014(7)

43.93%

In 2014, I will have seven bond issues coming due. About 43.93% of my portfolio will come due that gives around 20% interest in total. This money will be reinvested over the 2020s.

2015(6)

16.55%

In 2015, six bond issues will come due, which is about 16.55% of my portfolio. This money will be reinvested in many issues that mature in the late 2020s.

2018(5)

10.18%

In 2018, I have five issues coming due. That is about 10.18% of my portfolio. This money will be invested in bonds of the 2020s.

2019(1)

1.05%

In 2019, I have one bond coming due. That is 1.05% of my portfolio. This money will be reinvested maturing in the year 2030.

   

 In Summary

This is how I have my bond investments ladders over the next 18 years. I started investing in my IRA in 1982, investing in a few bonds at a time. The thing you have to do every pay is pay yourself first and put that money in your IRA.  I started placing serious money into my IRA since 2005. By that time most of my other obligations were over.

In 2031, I will be 80 years old. Investing only part of my investment money each year will help protect me from inflation that will come as sure as the coming winter.