Bond Ladders as Part of a Balanced Portfolio
Suppose you are an investor with a moderate risk tolerance, retiring with $1 million. You might take $400,000, or 40% of your portfolio, and buy eight bonds with a face value of $50,000 each. The first bond would mature in one year, the next would mature in two years, the next in three years, and so forth, thus laddering the bond portfolio over an eight-year period. This is a simplified example, but it gives you a general idea of how it works.
The remaining $600,000 would be invested in stocks (equities preferably in the form of index funds) to make up the growth portion of your portfolio. Eight years later, if stocks averaged a 7% rate of return, the $600,000 would grow to just over $1 million, allowing you to sell $500,000 of stocks to create another bond ladder.
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