Creating an investment portfolio can be a labor-intensive task. While it is certainly possible to invest in the most popular and well-known stocks of large companies, such an approach may not provide a solid foundation for the portfolio in the long term. To build a robust portfolio, investors mainly turn to funds and bonds. Bonds are often preferred due to the fact that, in addition to acquiring valuable securities, investors can also receive coupon payments which allow them to reinvest the received funds.
One effective strategy for establishing a strong foundation for future investments is the bond ladder approach. This strategy consists of five different long-term bonds, which consistently generate coupon income, thereby enabling the investor to reinvest these earnings into other securities and enhance the portfolio’s value without incurring excessive risks.
To implement this strategy, several operations are necessary. First, one should purchase bonds with ascending annual yields and varying maturity dates. Starting with a bond maturing in less than a year at an interest rate of 7.5%, the next step involves acquiring a bond with a two-year term at a higher rate of 8% per annum, and this process continues up to five tiers of the ladder, assuming a long-term investment plan. The average annual interest rate should ideally be around 8-8.5%. Upon maturity, the proceeds from the redeemed bond should be reinvested in the purchase of new five-year bonds to maintain the yields of the ladder.
It is important to highlight three key advantages of this strategy: predictable returns, cash flow adjustment, and risk reduction.
With predictable returns, one can easily ascertain the amount of funds that will be received. Furthermore, there is no necessity to preemptively strategize or extend scenarios in the stock market. Bondholders will possess bonds with both short and long maturities, which aids in minimizing the risks associated with a decline in returns from the chosen strategy. The risk of default is also mitigated by purchasing various types of securities. However, it is crucial to recognize that investing in securities issued by the same issuer does not eliminate risk and may not sufficiently cover anticipated expenses.
Ideally, it is advisable to purchase both foreign currency bonds and ruble-denominated securities. This approach enables the potential for greater compensatory payments, further mitigating risks. Holding funds in foreign currency can enhance the value of the securities or preserve their worth in the event of a collapse in the ruble or foreign currency exchange rates, respectively.
Bonds should meet the following criteria: a rating of at least BBB, a fixed interest rate, an annual yield between 8% and 15%, a maturity period of one to three years, and the securities should be standard without amortization.
