Article 6 The Bond Solution - Laddered Bond PortfoliosBy Michael Black, CFP, CDFA Michael Phillips Black & Associates investment policy is to include bond portfolios within accounts, even growth accounts. Bonds offer diversification for portfolios. They have performed quite well over the last 3 years, offering positive returns while there was volatility in stocks. It takes no rocket scientist to note that interest rates are low, the lowest in almost 50 years. If and/or when interest rates rise, the price of bonds will drop in value. When the bonds drop in value, this can possibly cause a negative effect on your total return for that asset class. Although our firm still believes that bonds play an important role in our client's financial portfolio, we feel "laddered bond portfolios" are a better choice given the economic cycle that could to happen, i.e. rising interest rates. Laddering involves building a portfolio of bonds with staggered maturities so that a portion of the portfolio will mature each year. By using Laddered Bonds, you can help protect your overall investment portfolio by reducing interest risk. What the laddered bond does is make time work for you. For example: if an investor buys bonds that mature every year for ten years - a one year bond, two year, three year and so on in their portfolio, they will get the yield that approximates a five year bond. The closer the maturity date, the less the bond price fluctuates. Where the bond maturity is long, the investor's portfolio will drop in value if interest rates rise. By using laddered bonds, the investor receives the yield and risk similar to a 5-year bond, which means less fluctuation of the portfolio when compared to owning long term bonds. Additionally, the investor can participate in the increasing yield environment of a rising interest rate market by always having maturing bond proceeds available to reinvest at the higher interest rates.