Creating A Bond Ladder For Passive Income
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Күн бұрынInterest rates have surged recently and one of the positive aspects of this is that you can now earn a much higher income whilst taking little risk. One approach to creating passive income via a low-risk stream of predictable cash flows is to build a bond ladder. So in this video, I will show you what a bond ladder is, how you can build one and what it takes to maintain it.
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Timestamps
00:00 Introduction
00:30 Why Build a Bond Ladder?
01:47 Government Bonds
03:45 What is a Bond Ladder?
04:11 Why Now?
05:15 Certainty
08:22 Yield To Maturity
12:36 Why You Can’t Use A Bond Fund
16:04 Building The Ladder
19:23 Ladder Maintenance
20:28 Conclusion
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DISCLAIMER
All information is given for educational purposes and is not financial advice. Ramin does not provide recommendations and is not responsible for investment actions taken by viewers. Figures that are quoted refer to the past and past performance is not a reliable indicator of future results.
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@grahamlewis6777 Жыл бұрын
One of your best educational videos I think. Thank you
@Pensioncraft Жыл бұрын
Wow, thanks @Graham Lewis
@tastypymp1287 Жыл бұрын
Ramin: 'No one loves bonds quite as much as me'. Also Ramin: 'I'm going 100% equity'.
@derhoc Жыл бұрын
This was amazingly educational, thank you!
@Pensioncraft Жыл бұрын
You're very welcome @Der Hoc
@Ganok Жыл бұрын
Thanks Ramin, was thinking about buying bonds myself for the 1st time :)
@RogerYeahmon Жыл бұрын
you need to commit plenty of capital.. £10k in a bond that pays 4% annually is still only £400 per year.. absolute peanuts..
@greennewworld2718 Жыл бұрын
"many of the people in the PensionCraft community locked in that high rate" ...Stretching the truth there...Way more of us also locked in to a lower rate way before that because of the advice in there 😂
@jam99 Жыл бұрын
No advice given here, just opinion,
@greennewworld2718 Жыл бұрын
@@jam99 Lol, yes of course- "THIS IS NOT FINANCIAL ADVICE" 🤭
@jam99 Жыл бұрын
@@greennewworld2718 That's right. You have to pay if you want 'financial advice'. Seriously, though, Ramin is not one of these YTers trying to tell you what you should be doing; he is more about educating us, enabling us to make our own personal risk assessments by asking the right questions, looking at sensible indicators and talking about the numerous options. He goes into far more depth than many. I have far more respect for him because of his style.
@carloschu7127 Жыл бұрын
If US start to QE, aka money printing, and UK follows, short term bonds should sell, not waiting for maturity. Calculate how second markets works and the price of your bonds.
@sanshuma0 Жыл бұрын
Very clearly presented as always - I had some understanding of this but was never sure if had the correct understaning, the video made it very clear and the graphics crystalised the concept forever in my head - Thank you!
@Pensioncraft Жыл бұрын
Excellent @Sachin Anshuman
@boscodomingo Жыл бұрын
I had no idea about bond ladders, but I think this will be the mechanism I'll use once I retire (in 45 or so years lol)
@HugoSomershamJones 3 ай бұрын
Thank you Ramin. I’ve long wondered “why bond funds” - this video along with your recent chat on the Making Money Podcast has finally got the penny to drop for me.
@Pensioncraft 3 ай бұрын
Glad it was helpful! @HugoSomershamJones
@msprinz100 Жыл бұрын
Great Video - Learned a lot - Thanks you!
@Pensioncraft Жыл бұрын
Glad you enjoyed it @msprinz100
@karlbe8414 Жыл бұрын
Great explanation, thanks. I am currently getting 3.5% in Vanguard settlement fund/Federal money market, after fees, some in a tax deferred, another in a taxable. Variable rate, but very liquid, monthly payments.
@Pensioncraft Жыл бұрын
Glad it was helpful! @Karl BE
@mikemoreno4469 Жыл бұрын
That was very well explained. Thank you, sir.
@Pensioncraft Жыл бұрын
Glad it was helpful @Mike Moreno
@johnennis3542 Жыл бұрын
Another excellent video and probably the best explanations of bonds I’ve come across. I’m a way from retirement but would definitely consider learning more in order to potentially implement it. What I would like to understand more is how many rungs a retirement plan would need. I assume anything that’s not going to be accessed for 10 years plus could sit in equities. The two immediate years on the horizon would be cash, so it’s the 3 to 10 year period that needs more of a balanced approach. Just need to figure that bit out in terms of what is directly held in bonds and how much in bond / equity funds. Thanks again Ramin. I will definitely become a member at some point!
@JohninRosc Жыл бұрын
Fabulous video as always and one I've been waiting for as many of your last few have pertained to buying single bonds and I've not understood how. Many thanks again.
@Pensioncraft Жыл бұрын
Glad you like them @JohninRosc
@sierraecho884 Жыл бұрын
Very well explained, I am also thinking of investing into bonds.
@johnennis3542 Жыл бұрын
John Ennis • 20 sec ago Another excellent video and probably the best explanations of bonds l've come across. l'm a way from retirement but would definitely consider learning more in order to potentially implement it. What I would like to understand more is how many rungs a retirement plan would need. I assume anything that's not going to be accessed for 10 years plus could sit in equities. The two immediate years on the horizon would be cash, so it's the 3 to 10 year period that needs more of a balanced approach. Just need to figure that bit out in terms of what is directly held in bonds and how much in bond / equity funds. Thanks again Ramin. I will definitely become a member at some point!
@gerry2345 Жыл бұрын
I like this vid. Good insight.
@Pensioncraft Жыл бұрын
Thanks @GerrysPlace
@peaceful4you408 2 ай бұрын
I have a unique bond ladder with Wealthfront that actually automatically compounds the interest so all I had to do was make a 1 time deposit and just let it sit and do its thing until retirement without having to add anymore additional contributions to it.
@Oldtimerider Жыл бұрын
Thanks!
@Pensioncraft Жыл бұрын
That's very kind of you @Dan l. Thank you!
@rightangletriangle3188 Жыл бұрын
I had 50% in bonds, mainly is US Treasury 40% 1-6 months, 10% in 12 months in retirement. Currently will fill out the ladder to 2 years with CDs as currently brokered CD rate is higher for >6 months when the bond matures.
@vh1775 Жыл бұрын
Can people in the Uk but US bonds?
@stuartb3502 Жыл бұрын
Addressed questions very clearly I’ve struggled with despite spending a lot of time trying to understand bonds: 1) difference between funds and buying individual gilts, 2) Why are yields rather than prices quoted. Really helpful, thanks. Prompted me to do further learning. I guess tax “non-advice” is even farther out than investment “non-advice”. Worth mentioning here however that UK investors should look at the income tax and capital gains tax status of coupon payments and capital gains on gilts (clue the first is income taxable, the second is free of CGT). Comparing gilts with fixed rate savings (if ISAs and SIPPs not an option) means that tax status can make all the difference on which way to jump and even what type of gilts to buy. I say that because, tax aside, fixed rate savings are currently competitive with gilts at 1,2, 3 and 5 years.
@tastypymp1287 Жыл бұрын
Are they competitive compared to inflation?
@stuartb3502 Жыл бұрын
@@tastypymp1287 Rhetorical presumably (as well as pointless).
@tastypymp1287 Жыл бұрын
@@stuartb3502 Not an argument. Try again ol sport?
@pistopit7142 Жыл бұрын
Ramin, could you make a video about how UK investor can practically get exposure to factors such as value and size?
@shimsteriom4191 Жыл бұрын
Thank you, very interesting.
@Pensioncraft Жыл бұрын
You are welcome @Shimster IOM
@WarrenBuffettDividend Жыл бұрын
Interesting perspective. A video about dividend stocks?
@iainshirlaw Жыл бұрын
Wonderful video.
@Pensioncraft Жыл бұрын
Thanks for visiting @Iain Shirlaw Business English Coach
@MidnightSun009 Жыл бұрын
So thats what a yield curve is! :D
@lifeisshort99 Жыл бұрын
I had 40% in bonds until last year. I sold and had cash. Recently I purchased 10% of my investment into CD ladder from 3 month to 2 yr. Interest is about 4.5%. I am planning to add as Interest goes up.
@davidyan7354 Жыл бұрын
4.5% in the UK? Where exactly?
@lifeisshort99 Жыл бұрын
@@davidyan7354 in US.
@8G00SE8 Жыл бұрын
@@davidyan7354 You can get 4.6% from Shawbrook bank right now in the UK for a 2 year bond.
@colinmackie8857 Жыл бұрын
@@8G00SE8 Not if you want to keep your cash in your SIPP
@abimbolaokusada2265 Жыл бұрын
Hi Ramin, please make a video about structured notes.
@GrandmaSledgehammer Жыл бұрын
Though with high inflation, plus higher rates offered on savings currently, bonds used in this way are only advantageous for particular situations e.g. larger amounts that need to be placed in a tax-free wrapper?
@tiffany.Elizabeth. Жыл бұрын
Question. - those coupons are paid out in cash at their date? Or held onto until the maturity payout. Also, do you create a separate portfolio to manage your bonds? I just have an RRSP & cash account right now. Thanks!
@mannymistry68 2 ай бұрын
Hi Ramin. Really enjoying your videos and I have subscribed. The question I had with regards to bond was what you get back at maturity and the prevailing bond price. Let's say you buy a bond for £100 and hold it to maturity. But at maturity, because of prevailing interest rates, that bond is selling at that time for £95, on maturity, do you get back £100 or £95?
@rhclark6530 Жыл бұрын
Enjoyed this. Please consider doing an equivalent for TIPs and comparing the two types. Thanks
@chrisp4170 Ай бұрын
Ok, so that was well-explained, thank you. But if for example you are looking to buy a 3 year bond from the list, are some better than others and if so, how do you choose?
@MartinJG100 Жыл бұрын
Yep. The US is setting the pace on yield on Treasuries but the frustration is that buying treasuries in the UK is not cost effective after allowing for commission/slippage/exchange rate fluctuations. The big question is whether we will see higher yields in the UK.
@tastypymp1287 Жыл бұрын
And inflation. You forgot inflation.
@MartinJG100 Жыл бұрын
@@tastypymp1287 I actually believe we are facing stagflation. Governments create inflation through debt which is the best way of reducing the value of that debt through asset inflation. Old as the hills and goes back thousands of years. We are clearly facing the spectre of economic deflation as part of a continuing process which has been in place for many years now. They spin the reality into glib statements to hide the real facts from the average Joe.
@tastypymp1287 Жыл бұрын
@MartinJG100 While I agree in general, it's not quite as straight forward as that because of the creditors. They are savvy to this and demand compensation. If they don't receive, they stop buying government debt. This is already being observed with some major countries becoming net sellers of US treasuries. Imagine buying treasuries with a 0.25% yield. Who would buy them? Well, at the time the narrative was the world was about to collapse. It was about safety, the safest prospect of getting your capital back whole or at all. Other concerns like yield were dismissed. But then imagine then holding these bonds and the world didn't collapse. What's more, inflation jumps to circa 10% against your 0.25% yield. And the reason that inflation is so high is that the same country that sold you the debt is the same country that caused the inflation due to their irresponsible and irrational monetary and geopolitical policies. You'd probably want compensation. And thus you might be offered the opportunity to buy more debt, but at much more attractive yields....
@dabay200 Жыл бұрын
The FT says 6 month yield for Gilts is 4%, but when I look at current price and work out annualised yield for gilts maturing in 31/1/23 and 22/7/23 the yields are more like 2.4% to 3.0% which is less than short duration gilts. Is the FT calculation wrong?
@javierlan1987 Жыл бұрын
ramin what about bond etfs like "I SHARES I BOND TERM CORPORATE ETF" and "INVESCO BULLETSHARES CORPORATE BOND ETF" they kind of behave like holding a pool of bonds untill maturity dont you think? and are a bit diversified.
@jnat992 Жыл бұрын
What about Canada? Could you outline similar plan/process for someone based on Canada?
@deankirk8554 Жыл бұрын
10 year fixed bond at 4.25%
@RogerYeahmon Жыл бұрын
bonds are only worth discussing while interest rates are up.. which they won't be for long..
@AB-cn6iu Жыл бұрын
What do you think of investment grade credit at this time?
@eweng903 Жыл бұрын
With UK bonds at significant negative yields this year and likely to be significantly negative again next year based on OBR and BoE forecasting a bond ladder constructed now using UK gilts would face very significant headwinds with regards the purchasing power of your fixed income. Far better to construct such a ladder when you are looking at positive real yields if you can.
@nixer65 Жыл бұрын
Agreed, however all cash savings accounts are below the current bond yields. Hence if you need to stash cash this isn’t a bad approach.
@stevo728822 Жыл бұрын
Great video Ramin but it does once again suggest favourable market timing. Those who bought at the recent peak in yields only did so with hindsight. And the value of a bond falls as it approaches maturity.
@jam99 Жыл бұрын
Can you explain your ‘but’, Stevo? Not sure what point you are making. Is timing not an option with all investment?
@chrisf1600 Жыл бұрын
There's no market timing. If you like the yield on offer, buy. If you don't like it, don't. Also, the value of a bond will rise OR fall as it approaches maturity - it depends on the specifics
@stevo728822 Жыл бұрын
@@jam99 I would argue that timing should never be a factor in your investment choices. I don't use market timing to allocate my assets. I use 50 to 100 year trends since I cannot predict the future.
@stevo728822 Жыл бұрын
@@chrisf1600 No, the value of the bond will always fall as it approaches maturity. The closer it is to maturity, the fewer coupon payments there are.
@keithlos1497 3 ай бұрын
Nice video..but didnt address taxation...or did i miss it ?
@pistopit7142 Жыл бұрын
Thought that bond ladder is prone to colapse following recent events in bond market. Also wow, we are finally mentioning DMO. Good luck buying Gilts from them. Spoiler: you will need patience combined with IQ above average. I'm bitter about bonds, I choose cash. It took me to long to realise this thanks to the fnancial channels advocating that bonds are negatively corelated to equities like some sort of axiom.
@jam99 Жыл бұрын
Why would it be prone to ‘collapse’? This would only happen if the gov defaulted. You know what you are going to get though you don’t know future inflation. Is that what you mean? There is far too little outrage out there towards financial advice regarding bonds and their supposed 1) non-volatiity compared to stocks and 2) negative corelation with stocks. This also includes the ‘risk rating’ on every fact sheet. All most advisors do is tell you the average of the last 100yrs; they do not assess current risks for you. All these middlemen make their money from a non-performance related cut, which is the biggest con in the finance world.
@jam99 Жыл бұрын
Just to clarify, Ramin is not an advisor and I am not referring to him.
@rightangletriangle3188 Жыл бұрын
The long duration bond got punished as hard as stocks this year due to rising interest rates from close to 0%. The short duration bonds like T-bills are performing ok, they yield about 4.5% and you can hold them to maturity without any loss in principal. Compared to S&P 500 index loss of 18% this year, it's a safe haven. Therefore, bond is not a complete failure in the portfolio if you know what to hold at this time.
@RogerYeahmon Жыл бұрын
a bond ladder... a B. Ladder.. bladder.. bladdered.. 😵
@Nick89000 2 ай бұрын
Didn’t quite understand the concept of why you buy the bonds with different maturity dates. Why not just all 3YR bonds?
@coolmonkey619 Жыл бұрын
How do I buy bonds
@deankirk8554 Жыл бұрын
Buy Argentina 🇦🇷 bonds at 49% 🤔
@Chris-lr2qb Жыл бұрын
What about the same strategy, but fixed-term savings accounts?
@lesjames5607 Жыл бұрын
Yep, currently doing this with fixed income saving bonds. Yield 4-4.5% over various terms risk free. Also you can earn up to £1k per year (basic rate tax payer) interest without paying tax so if you’ve maxed out this years ISA allowance there’s still another grand to be had tax free.
@robweinberg9396 Жыл бұрын
great video, but have 1 question: is a bond ladder composed of treasuries considered cash or bonds?
@jam99 Жыл бұрын
Eh? Bonds are bonds, until you sell them into cash, or they mature into cash.
@robweinberg9396 Жыл бұрын
@@jam99 i believe that some consider short term treasuries to be cash equivalents. what about cds?
@boombustinvest 9 ай бұрын
So, why then isn't there a Band Ladder fund where people can pay in and then elect whether or not to reinvest the principle on maturity with the und manager taking a small cut o the overall return to the investor? Investors then have 'bond fund' without the price variability.
@Slo-ryde 9 ай бұрын
They can’t make money off of it as they do with bond funds, because they can’t churn it.
@piersfisher4606 Жыл бұрын
Why would you not just do a year bond or a savings account that is a year long , you can get above 3.15% easily
@simony2801 Жыл бұрын
Because you can lock the bond at ten years. Interest can be anything then.
@tenorref Жыл бұрын
My online broker demands a minimum purchase of $5000. That means an investment of $25 000 for a ladder. Maybe not a problem for some people ……..
@NedFlanders39 Жыл бұрын
Is there much point in buying bond funds at the moment when you can get higher returns from high Street savings accounts? E.G 4-5% at Lloyd's compared to 1.7% vanguard bond funds
@asmerom3025 Жыл бұрын
Lloyds does not have a savings account paying 4%.. Perhaps you are thinking of the Lloyds account attached to a mortgage application by a family member.
@NedFlanders39 Жыл бұрын
@@asmerom3025 was an example, but Nationwide offer 4% and im sure others offer the same or more dot dot dot
@actuallythedog263 Жыл бұрын
Answer it’s pointless 4.35% readily available for 1 year FCIS guaranteed fixed rate cash saved in a bank .. why take market risk on bonds with a lower yield .. It makes absolute zero sense
@fredatlas4396 Жыл бұрын
@@actuallythedog263 which UK banks or building societies are offering that much interest on 1 year fixed savings account
@pistopit7142 Жыл бұрын
No, there is no point.
@billrailsback5176 Жыл бұрын
Didn´t see much mention of risk on Corporate bonds- clients could lose their entire capital.
@jam99 Жыл бұрын
This video is about gov bonds only.
@toke182 Жыл бұрын
Ramin, are you aware of the idea, that when CBDCs are introduced, the bonds will stay on old fiat currency which value will be withering away as time passes and they are not used anymore? so you might have 10k in pound gilts that in 10 years might be 500 britcoins? It seems it has happened multiple times in history when there is a monetary reset
@8G00SE8 Жыл бұрын
I don't think we are any closer to that, crypto is getting destroyed at the moment, any idea of it replacing existing currencies is probably further away from reality than at any point in the last 5 years.
@PercyY-ib2vx Жыл бұрын
Bond ladder has low yields. 3 % ? Who wants this ?
@crashnreset6987 Жыл бұрын
Clearly, there are a lot of morons around, personally I'm in gold and silver I just come here for the comedy ;D
@its1me1cal Жыл бұрын
You can get about 4% on a fixed 1 year savings account now, more when the Bank of England increase the rate soon and a lot more if you fix it for longer. Why would we want something that yields 3%?
@barnstar2077 Жыл бұрын
He literally explains in the video why people use bond ladders and what the advantages are over equity funds and gives examples of when they might be used. He at no point says they are right for everyone's circumstances.
@crashnreset6987 Жыл бұрын
@@barnstar2077 Yea... it really is important information for those who want to travel back to the 90s when inflation was 3% and bond yields were at double digits ;p
@barnstar2077 Жыл бұрын
@@crashnreset6987 - It isn't about yields, again, if you watched the video you would know that.
@CFFRecords 7 ай бұрын
Passive income is far from the info provided
@zanychelly Жыл бұрын
Buying English bonds is risky as buying bonds from Argentina. Complete political mess + A economy that have no real output growth in ages. Better off buying Treasuries. But that is just my opinion on Bonds.
@NedFlanders39 Жыл бұрын
How is it risky if it's a guaranteed payment?
@zanychelly Жыл бұрын
@@NedFlanders39 guarantee 1000 pounds, in 2030… that have an equivalent value of 10p as of now.. of course I’m exaggerating, but you get the idea. Mostly because of an economy in stand still + monetary policies and political decisions that doesn’t help the real economy.
@helixvonsmelix Жыл бұрын
@@zanychelly the points you make are why one would buy bonds. 🤣
@imalebowski Жыл бұрын
@@NedFlanders39 He's talking out of his behind. The UK has only fully defaulted once in the 20th Century (in 1932 under inter-allied debt repayments, which were linked to German payments that were halted, so academics refer to this as an "excusable default" as Germany was considered the actual defaulter), and one not-a-default-but-yikes moment in 1917 when the coupon on 5% Chequer Bonds was dropped to 3.5% (but people were offered their principal back and most people took the haircut because it was better than what was available elsewhere). Argentina on the other hand routinely defaults on it's bonds. In 1979 The US defaulted on $120 million on treasury debt, a small part of debt repayments. If you're based in the UK and earn Sterling it makes sense to buy Gilts in most cases. If you're based in the US, Gilts are normally not worth it due to currency risk.
@zanychelly Жыл бұрын
@@helixvonsmelix Sure. Go on buying debt.. while England prints money, and default by inflation.