Build An Income Ladder

Use these four portfolios as a guide to harness higher interest rates.

- Jeffrey R. Kosnett

IT’S A SURE BET THAT interest rates have settled into a higher range and are poised to rise further. But don’t let that scare you away from bonds (when rates are rising, bond prices tend to fall, and vice versa) or from certificates of deposit. If anything, the volatile stock market should be nudging you toward more bonds and CDs, not fewer.

Still, the rate outlook demands some caution in your fixed-income strategy. The market value of long-term Treasuries and other bonds is apt to shrink more, especially if inflation rises enough to shock bond traders into demanding higher yields on new investments.

But it’s worth remembering that when a bond matures, the issuer returns the entire face amount. So a bond whose price falls to 95 cents on the dollar will eventually pay you back 100 cents, unless the borrower defaults or you sell in the interim. Income-seeking investors can stick to a simple plan to protect bond principal from getting nicked by rising rates, while collecting a decent income and reinvesting returned capital for a higher yield as rates continue to climb. You can accomplish this with an old-school technique called laddering. It works well with certificates of deposit and with individual bonds.