Long versus short. Tough decision. If you know you are going to need your money back in 2, 3, 4 years, buy bonds that mature in 2, 3, 4 years. You can sell your longer bonds before maturity at going market rates. But why subject your savings to the vagaries of the marketplace? On the other hand if you have no particular timetable for the reuse of your capital, build a “ladder” of staggered maturities. Re-investing the proceeds of maturing bonds keeps you abreast of any changes in interest rates, up or down, over the life of your portfolio.
If you are getting on in years, build a “Barbell Portfolio” of long maturities at one end of the portfolio for their relatively higher yield and short bonds at the other end of the barbell for their relative market stability. Ladder the short maturities to come due over a reasonably comfortable span of, say, one to five or six years. And at the long end of the barbell go for the highest yields you can get your hands on, if it’s money you have no intention of touching in your lifetime. After five or six years all your original short bonds will have been replaced at new going rates. Meanwhile the long end of your barbell remains intact, earning the higher return you locked in when you began your Barbell Portfolio. A good portfolio is diversified as to maturity as well as locality. “Never all long. Never all short. Never all wrong.”
IS IT CRAZY TO BUY A 30-YEAR BOND
AT AGE 80?
Lesson 6: More On Long Bonds
How to get the most out of a municipal bond without waiting until the year 2040.
One way is to buy municipal bonds maturing in 2040 -- even if you don't expect to be around by then. This seeming paradox is explained by the fact that it is not a contest to outlive your bonds. If you want your income now to live on, go for bonds with the highest coupon rates available to you. And enjoy the superior current return being spun off by that high coupon rate during your lifetime. And when your bonds come due, your principal will be returned to you, or to your heirs. (You’re going to leave an estate in some form. What difference whether you leave them money or municipal bonds that are worth money?)
How long is long term to you? One year…ten…twenty? For some people long term is one day longer than when they need their money back. But if it’s money you haven’t touched in years and aren’t likely to touch, time is your partner in life and investing. After the 85 years Lebenthals have been at this business of municipal bonds for the individual investor -- through 5 wars, 14 recessions, 1 Depression, The Great Inflation, The Great Recession, and market after market – we have acquired a reverence for time. It heals. It gives the pendulum a chance to swing both ways. It smoothes out the lumps. It gives a run of tails a chance to come up heads. It turns the ups and downs of markets that feel like forever into just another day on the way to San Jose.
What’s 10, 20, 30 years to a professional who sees 10, 20, 30 year bonds mature every 15 days?
If you know you are going to need your money for a specific purpose on a specific date in the future, target the maturity date. But if you can be open ended about maturity – and don’t need the interest income from your bonds to live on, consider what happens when, say, the tax free dividends of a mutual fund of tax exempts, instead of being paid out, are reinvested in additional fund shares that accumulate and build. Compounding by itself is no guarantee of investment success and can be humbled by loss of market value in the thing compounding. But it stands to reason that the more of that thing accumulated over time, the bigger the multiplier than will be working for you when you decide to sell.
Time is the stuff of compound interest. It is the soul mate of investing, and the best friend the long term investor’s got.
