Build a Bond Ladder

May 2008

The best way to manage a collection of individual bonds is to stagger their maturities and the timing of your interest payments. This setup, called a bond ladder, protects you against a flare-up of inflation and rising interest rates because you'll have regular infusions of cash to roll over into new bonds at higher rates. The same idea works for bank certificates of deposit.

Focus on U.S. Treasury notes and bonds, or high-quality municipal bonds. They're best for ladders because the supply is plentiful and the chances of default are practically nil. Alternate maturities among one, three, five and ten years.

Don't try this with bond funds. You have no control over the timing and maturity of bonds in a fund. Plus, a bond fund will give you a shot at capital gains in a bullish bond market -- when interest rates are falling -- but your fund shares will lose value when interest rates rise.

Rest easy. You won't lose principal as long as you hold each bond until it matures.

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