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Date of maturity, not purchase, key to "laddering'

Published Oct. 12, 2005

Q. I've had $50,000 in six-month and one-year Treasury bills that I usually renewed, but now that the interest is so small, I have started buying Treasury notes. You and other financial writers sometimes refer to laddering, described as buying notes with varying maturities. If I wanted to do this, should the notes be requested in successive months or all at the same time? Can you clarify my thinking on this?

A. Whenever you hear the term ladder used in conjunction with interest-bearing securities such as bonds, notes and certificates of deposit, it refers to a portfolio of securities maturing on different dates.

Ladders can be custom-designed to suit both the amount of money you have available to invest and your particular income needs. One person's ladder might have a security coming due every month, while another person's ladder might have maturity dates arranged so they are a year apart, or even two or three years apart.

A ladder is a way to get a higher yield than you could get on a portfolio containing only short-term investments, but with less risk than you would have with a portfolio of long-term investments maturing all at the same time.

You increase your yield by buying longer-term maturities. Instead of T-bills rolled over every six months, you might buy one note maturing in 18 months, one in 24 months, one in 36 months and so on, until you run out of money or your ladder is as long as you want it to be. As each note matures, you reinvest the proceeds in a note maturing at the end of the ladder. Reinvesting regularly gives something of a hedge against rising interest rates.

The important thing is the maturity date, not the purchase date. If you are buying Treasury securities directly from the Federal Reserve Bank, you can buy only those maturities that happen to be available at auction. (For information on buying securities at upcoming auctions, write the Federal Reserve Bank of Atlanta, 104 Marietta St. NW, Atlanta, GA 30303.) If you are buying through a bank or brokerage firm, you have to pay a commission, but you can easily get any maturity dates you want.

Q. Is it better to buy an open-ended intermediate government bond fund or an intermediate government bond fund investing in laddered years and returning principal and interest as the bonds are retired?

A. I think an intermediate government bond fund is a reasonable choice for part of an investor's portfolio as long as the investor understands that share values would decline if interest rates rise.

I've never heard of a fund that pursues a strategy of laddered investing and scheduled return of principal as you describe _ although with thousands of mutual funds out there, it's certainly possible one exists. Perhaps one of our readers will write to inform me.

One disadvantage of owning a fund that returned principal would be the record keeping. You would need to keep careful track of your returned principal to avoid paying income taxes on it. In addition, you would need to reinvest the money to avoid having your nest egg dwindle to nothing.

Q. We would like to have some information on what we should do here in Florida to leave our house and money to our children and grandchildren and avoid probate.

A. I encourage you to see a lawyer who handles wills and trusts. A lawyer can tell you whether some type of trust would be best for you or whether a will alone would be adequate. The answer depends on the size of your estate and other individual circumstances. Trusts can be very beneficial, especially if your estate is large. However, they aren't necessary for everyone and there's no sense paying for something you don't need. Whether you decide on a will, a trust or both, you should have a lawyer draw up the papers.

Don't focus too narrowly on avoiding probate. Your goal should be to convey your property to your intended heirs in the most efficient way possible. Sometimes a will that goes through probate is the best way to do that.

Helen Huntley writes about investing and markets for the St. Petersburg Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Questions should be sent to Helen Huntley, St. Petersburg Times, P.O. Box 1121, St. Petersburg, FL 33731.