The Current Income strategy is suitable for those individuals who require regular cash disbursements from their portfolio, or who would like to shelter a portion of their capital from short-term fluctuations in value, while still receiving a healthy rate of return. In order to develop the appropriate individual income generation strategy, two factors are taken into consideration: 1) The amount of income needed, and 2) The amount of capital invested. With these two pieces of information, we can structure a “laddered” bond portfolio that maximizes income while minimizing the risk to your capital due to changes in interest rates and inflation.

By laddered, we mean the portfolio is divided into bond “rungs” with maturities beginning at one year, and then moving farther out in succeeding yearly intervals. The number of yearly rungs needed in the ladder is determined by the amount of income needed from a given amount of capital. The rule of thumb is that the greater the amount of income needed to be generated from a set amount of capital, the more rungs that need to be in the ladder, i.e. you must hold bonds with relatively longer maturities. This is because typically, the interest rate paid on bonds increases with their date to maturity. This in turn is due to the fact that the value of longer dated bonds is at a relatively greater risk to changes in interest rates and inflation than that of shorter maturities.

By laddering a bond portfolio, rather than investing exclusively in a single maturity, risk and reward are optimized. In a laddered bond portfolio, bond rungs mature every year, and are then reinvested at the back end of the portfolio at the current market interest rate. Therefore, if interest rates and inflation go up, you have the opportunity to reinvest at the higher rate, thus maximizing your returns, and minimizing the risk of a decrease in the market value of your portfolio. A non-laddered portfolio, on the other hand, loses value and does not increase the amount of interest you receive if interest rates and inflation go up.

We generally use insured certificates of deposit (CDs,) US government obligations, and investment grade corporate credits to construct laddered bond portfolios for retirement accounts like IRAs or pension accounts, while utilizing investment grade municipal bonds in non-tax advantaged accounts to maximize after tax returns. We do fundamental research on the bond issuer to gain maximum confidence that they have adequate cash flow and marketable assets to insure payment of the interest and principal of the bond.