Municipal Bond Forum
When simple arithmetic reveals ladder myth
Q
Your article on how laddering doesn’t work is another whopping example of misleading junk finance. I am not commenting on the “laddering thing,” just on your erroneous math.
A
James A. Klotz responds:
We used simple arithmetic in our example: We compared a high quality 10-year laddered portfolio today that would produce an average yield of about 2.00%, with a long-term bond of similar quality that can be purchased to yield about 4.50%. Many brokers, we said, would see that as a 2.50% difference, when 4.50% is actually 125% more than 2.00%. Why should investors care? On a $100,000 investment, you would earn $2,000 of income per year on the laddered portfolio vs. $4,500 on the long-term bond.
Our commentary, “Dow’s Recent Rise Obscures the Real News“was not intended to suggest that investors should buy bonds instead of stocks. Our purpose was to expose the folly of short-term laddered bond portfolios that are recommended by many major Wall Street firms.
Since you declined to comment on the “laddering thing,” we obviously missed the mark.
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