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Bond ladders

reformed nice guy

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reformed nice guy

I currently have what I think is a fairly diversified portfolio but bonds are something that I have not looked into too much detail. I have some money in some Vanguard bond funds but I came across an article talking about "bond ladders".


The concept is interesting and the logic of not having all of your eggs in one basket appeals. I was thinking about doing something similar but with a bit more diversification. Gilts, US treasuries and some retail bonds (only blue chips like Vodafone etc).

I haven't got to the stage of planning one out yet but I wanted to hear if anyone here does something similar? Are there any strong reasons against doing it in general? Is this a particularly bad time if there is a risk high inflation wiping out yield? Would deflation increase their relative return?

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He's not describing a ladder -- that's specifically a process of gaining wealth through exploiting debt and inflation.

What he's describing is an averaging in and out process.  This is lovely and low risk, but I'd note that the current returns are lower than the inflation rate -- and likely to always be below inflation until the point where governments have decided that they have no choice but to remove money from the economy (and that's not going to happen).

So, the risk with a 'traditional ladder' is that it works really well up to the point that you can't handle the interest rates and become bankrupt and lose absolutely everything (not just the investment -- everything).  The risk with this bonds averaging process is that you lose 1% (at the moment) of your capital every year, but almost certainly not much more than that (unless you live in Venezuela, or a country likely to become a facsimile).  Most investments are somewhere in between -- you'll make more than inflation (and thus keep up the value of investment), but run the risk of losing some or all of the capital invested. 

That said, it all depends on the environment you're in.  If you believe DB (I do), then we're about to enter a 'and.... it's gone' stage, where treasuries or gilts are the only things that actually are guaranteed to return your capital.  That said, a normal bank account (up to the guarantee limit) is probably equally as good.  The difficult bit will be the timing required to invest in inflation-proof stuff just before the re-inflation stage -- at that point you'll definitely not want to be in fixed-rate bonds.

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