sophie wrote:Another issue with a ladder: who knows where rates are headed. I'm assuming that until the Fed calls it quits on interest rate increases, I should stick with short durations.
Exactly, since I don't where rates are going I will sit in the middle. I figure a 5(/7)yr ladder will keep track with inflation and its average maturity is short enough to track a moderate rate rise : eg. two or three 25 point rises a year. I could loose a couple percent, big deal. But I'm certainly not tempted to go to 20/30 years for only 1% extra at several times the vulnerability. So I don't hold long bonds. I wouldn't be able to sleep at night.
If stocks crashed I would be more than happy to feed the lower rungs into equities. Thats my dream. (and probably rates would come down then anyway). Alternatively, if rates and inflation improved at a healthy rate my alternative hope is real rates on TIPS improved I would start feeding buy some of those and get some rational/safe inflation protection. Basically my 5yr bond ladder is a holding pattern....
Rebalancing:
Coupons from the notes in my TD account just accumulate in 30 day bills or its 0% cash account (proper cash) and dividends from stock just go into (Vanguard) money market account. After while I will push accumulated cash to either equity and/or new bond rungs for rebalancing.
I'm not overly worried about "emergency cash" : I (currently) have an OK job, no mortgage/debt, decent insurance.
My coupon payments/dividends over a few months are OK. Anyway, whats the worst that would happen ? - I don't reinvest a few rungs (I have monthly granularity; I don't/won't/can't sell actual note because they purposely in TD to prevent me from doing this; which I might be tempted to do in a fund if I could see its value), better than having that pure cash sitting there indefinitely at half the interest waiting for disaster.