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Bullets, Ladders, and Barbells: Strategies for Making the Most of Your Bond Investment

Wednesday, Feb 24, 2016

Navigate the Muni Bond Market with Successful Investment Strategy

When deciding to invest in municipal bonds, all investors share three fundamental goals – to minimize risk, to maximize earnings, and to suit personal financial objectives. Municipal bond investing strategies can be used to achieve these three goals when implemented correctly. Deciding which strategy is right for you takes careful planning and strategic thinking. The bond specialists at GMS Group can help investors create an appropriate strategy for successful navigation of the muni bond market.

Three of the most effective and frequently used municipal bond strategies are the bullet strategy, the ladder strategy, and the barbell strategy. Each takes a different approach to helping investors deal with the primary risk of bond investment: interest rate risk. They also increase the flexibility of a portfolio, so investors have more ability to take advantage of opportunities in the market and to tailor their investment portfolio to a specific set of objectives.

The Bullet Investment Strategy

The bullet strategy is ideal for investors who seek to have a specific amount of capital at a set future date. For example, investors who are saving for a major life expense, such as home buying or financing a child’s education, could use this municipal bond strategy to reach their goals.

  • How it works – An investor buys muni bonds on various purchase dates, all set to mature at a specific point in the future.
  • The benefit – Investors can stagger purchases in such a way as to invest in municipal bonds with better rates, capturing the optimal amount of income until the set maturity date.
  • The downside – If interest rates fall over the bond purchasing period, then an investor would have been better off purchasing bonds all at once, rather than staggering to try and capture more attractive rates.

The Ladder Investment Strategy

Laddering is useful for buy-and-hold investors. The longer the time horizon, the more potential for this strategy to deliver.

  • How it works – An investor purchases a portfolio of muni bonds, all with different maturity dates, such as every year or every one, three, five, and ten years. Each time a bond matures, the investor can reinvest the principal.
  • The benefit – Investors always have a bond close to maturity, and so, they can always take advantage of higher rates by reinvesting.
  • The downside – Many bonds have to be purchased, which can be more expensive than simply purchasing fewer, larger bonds.

The Barbell Investment Strategy

The barbell strategy can be used by investors with a long investing time frame and an active investing style.

  • How it works – Investors invest in a combination of short and long-term bonds, leaving intermediate bonds out of the bond portfolio.
  • The benefit – The barbell strategy combines the prime advantage of investing in short-term muni bonds – liquidity – with the prime advantage of opting to invest in long-term municipal bonds – normally with higher yields.
  • The downside – Investors must regularly look for new bonds to invest in as the short-term bonds reach maturity.

Want to know more about implementing a successful strategy to meet your financial objectives? Let the GMS bond specialists assist in developing a municipal bond portfolio that works for you by contacting us online or by calling 877-457-0070.