How to use ladders, barbells, and bullets as investment strategies?
When investing in financial, FX, or other markets, investors face various risks, including interest rate risk, inflation risk, call risk, and credit risk. There are many ways for how investors to create safety cushions to protect their portfolios from the risks. The bond investment strategies of which we will talk now require time and effort to show results, which will minimize risks and maximize returns.
First of all, let’s talk about the ladder strategy, where bonds mature at different times, and you can continuously reinvest in them. The investor has an opportunity to spread his/her investments over different bonds, having different terms and maturity dates. By this method, investors protect themselves and their invested money from being stuck in a bond over a long period of time. For instance, if an investor is willing to make $200,000 worth of investment, what the ladder strategy will suggest is investing different amounts of money into different bonds which maturity dates are also different. By this method, investors will have a diverse portfolio with lower risks and higher returns.
The second method is called a barbell strategy by which they can make both short-term and extremely long-term investments. The long-term bonds offer higher returns, while short-term bonds are more flexible and give investors the opportunity to adjust their investments because of the liquid nature of bonds. So, if interest rates start to rise, investors can reinvest their money into bonds with more favorable conditions. While short-term investments are flexible for investors, long term bonds also offer a variety of advantages. Long term bonds will also give the investors a steady cash flow of higher-yield income.
The last strategy of investment is the bullet. With this strategy, you invest in bonds at different times, all of which have the same maturity date. If an investor is sure about the fact that he or she will need a certain amount of money in the future, this is the best strategy they can implement. Since the maturity of the bonds is all the same, investors base their decision on the most favorable interest rates. This strategy is very favorable for investors who are certain about their future needs. However, you will need to be cautious and keep an eye on interest rates constantly to successfully follow this strategy.
Overall, there is no best strategy among these three. You will need to understand what are your goals. Whether you need money in the near future or wish to get higher returns. You may also want to distinguish the best market offers and invest in them regardless of the maturity dates. After you realize which option is suitable for your financial goals, you can choose the investment strategy accordingly. If you choose the first option, meaning you need the money in the near future, probably the best option is by using a barbell strategy where you not only have the opportunity to invest in long-term bonds but short ones as well, which are liquid enough to fulfill your immediate financial needs. If you are more concerned with getting your investment returns all at once, bullet strategy is the best. Finally, for constantly reinvesting and following the market trends, ladder strategy is what you can consider.