No. of Recommendations: 6
Bill,

I've got nothing against bond ladders. What is stupid is the effort and expense to construct them and the belief they offer some kind of financial magic.

What's the usual advice given to bond newbies? Something like, "Pick a time frame/time range and then go into the market to buy the rungs." However, those rung are NEVER priced equally with respect to any sensible metric you want use. Instead, some maturities are over-bought. Some are under-bought, depending on a whole bunch of factors, including institutional forecasts.

What makes far better sense is to buy whatever the prevailing "sweet spot" is and to leave some of the rungs unfilled. What you'll find, however, is that soon enough another and different sweet spot will occur. Over time, and with consistent and disciplined buying, a fairly good ladder will result, none of whose rungs were over-priced.

What distinguished the fixed-income game from the equity game is that every basis point matters and that it's an institutionally-dominated market where "the big boys" have all the advantages. The small bond investor has to buy as cheaply as he/she can and buying campaigns that over-pay so they can quickly build tight ladders are stupid nonsense that just puts money into brokers's pockets.

Arindam
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