Three Safe Investment Strategies for Conservative Investors Using Individual Bonds

What strategy for individual bonds should a conservative investor who wants yield and safety of principal, be looking at? In this video we will go over some important considerations for conservative investors, then we will review three individual bond strategies.

The Strategies are:

• All treasury ladder.
• 50/50 Treasuries and Corporates.
• All municipals

Important Tactics and Considerations Covered:

• What is a Conservative Investor?
• Limit Your Maturity
• Use a Bond Ladder
• Stick with Investment Grade Credit
• Select Bonds Using Yield To Worst (YTW)
• Hold Bonds to Maturity and Do Not Trade Them
• Review of Individual US Treasury Bonds
• Review of Individual Investment Grade Corporate Bonds
• Review of Individual Investment Grade Municipal Bonds

Strategy 1) All Treasury Ladder

The all-treasury ladder is the most straightforward and simple individual bond strategy an investor can create. Structure your ladder so that you have 20% of the portfolio maturing every twelve months on a rolling basis. For example, for a $2 million dollar bond ladder, purchase $400,000 of treasury bonds maturing each year for the next 1, 2, 3, 4 and 5 years. In 12 months when the first bond comes due, use your $400,000 of principal to purchase new bonds coming due in 5 years. You can use either fixed coupon treasuries or zero-coupon treasuries, or both, for this ladder, depending upon your cash flow needs and timing preference.

Strategy 2) 50/50 Treasuries and Corporates

This strategy takes slightly more risk than the all-treasury ladder but can provide higher returns. Use a five-year ladder for all the bonds. For a $2 million dollar bond portfolio, invest $200,000 at 1, 2, 3, 4 and 5 year maturities for both treasuries and corporates. Use either zero coupon or fixed coupon treasuries. Split the corporates between fixed coupon and floating rate bonds. Security specific risk for corporates can be reduced by limiting the position size in any single corporate issuer to not more than 2% of the portfolio.

Strategy 3) All Municipals

This strategy should only be used by investors in the highest tax brackets. For a $5 million portfolio, invest $1 million at 1, 2, 3, 4 and 5 year maturities. Decide if liquidity is a concern. If you can accept liquidity risk, include small issues in the portfolio for additional potential yield. Security specific risk for munis can be reduced by limiting the position size in any single issue to not more than 2% of the portfolio.

Helpful video on calculating Taxable Equivalent Yield for municipal bonds:

   • Municipal Bonds. Are they Right for You? T...  

Timestamps:
00:00 Intro
00:23 Three Strategies
00:56 Limit Maturities
01:43 Bond Ladder
02:06 Investment Grade
03:00 Yield to Worst
03:31 Hold Not Trade
04:04 US Treasury Bonds
05:36 Investment Grade Corporates
07:10 Investment Grade Municipals
09:44 Strategy 1. All Treasury Ladder
10:34 Strategy 2. 50/50 Treasuries/Corporates
11:20 Strategy 3. All Municipals


This video is for educational and illustrative purposes and is not financial advice. Your broker or advisor will charge you fees or commissions to make investments and therefore your returns will be less than indexes. For example, if you invest in the S&P 500 ETF, SPY, you will pay a fee to the company managing the ETF, State Street Global Advisors. Your return on the S&P 500 ETF, SPY, will be less than the S&P 500 Index TR because of the fee paid to State Street Global Advisors. Additionally, you may pay a fee or commission to your broker or financial advisor, further reducing your return, below the index. Consult your advisor or broker for a detailed list of their fees or commissions before you invest. Investing involves risk and you can lose money.