Not Bond Laddering . DYNAMIC Bond Laddering!
By J.R. Robinson, Founder, Financial Planning Hawaii
Most financial advisory firms that manage fixed-income portfolios use bond mutual funds or ETFs. At Financial Planning Hawaii, we take a very different approach. We never use bond funds. Instead, we purchase individual Treasury securities, CDs, generally with the intention of holding them to maturity. We also use money market funds as a placeholder when we are waiting for rates to rise.
I have explained the rationale for avoiding bond funds in previous articles. In a nutshell, bond funds expose investors to interest rate volatility without providing the certainty of a known return at maturity that individual bonds and CDs offer. This distinction is particularly important during periods of rising interest rates.
We are certainly not alone in our predilection toward individual fixed income securities. Indeed, many financial planners use individual bonds with staggered maturities to hedge against interest rate changes in either direction.
The basic concept behind this laddering of maturities is that, if interest rates rise, the proceeds from maturing bonds can be used to purchase higher yielding bonds at the end of the ladder. If rates decline, at least you have locked in a significant portion of the portfolio at higher rates.
But our approach to fixed-income investing differs from conventional wisdom in another important respect. We don't just ladder bond maturities. We manage our ladders dynamically.
Why We Favor Shorter Bond Ladders
Conventional bond laddering involves purchasing bonds with staggered maturity dates, often extending 10, 15, or even 20 years into the future.
There is nothing inherently wrong with this strategy. However, I believe it overlooks two important considerations.
First, investors are not always adequately compensated for extending maturities. Historically, we have often found that Treasury securities and CDs with maturities of five to seven years can capture around 80% or more of the yields available on much longer-term bonds, with substantially less price volatility.
Second, blindly reinvesting maturing bonds at the far end of a predetermined ladder makes little sense when interest rate conditions are constantly changing.
Why should an investor automatically purchase another five-year bond when rates have fallen dramatically and economic conditions suggest they may soon rise?
At Financial Planning Hawaii, we don't.
What Makes Our Bond Laddering Dynamic?
Instead of maintaining a fixed ladder with equally weighted maturities, we continuously evaluate the interest rate environment and adjust both the length of our ladders and the amount invested at each maturity.
Sometimes we reinvest maturing proceeds at the far end of the ladder. Sometimes we reinvest in the middle. And sometimes we don't reinvest at all. That's where money market funds come in as a placeholder.
Our decisions depend on our assessment of prevailing interest rates, the shape of the yield curve, economic conditions, and the relative attractiveness of keeping funds liquid.
A recent example illustrates how this works in practice.
During 2022 and 2023, when the Federal Reserve was aggressively raising interest rates, we established ladders of individual CDs and Treasury securities out as far as 5 years at 5% Interest. When rates peaked in November 2022, it was unlear to me whether rates would go higher or not, so our ladders were relatively evenly weighted.
As those investments began maturing throughout 2025 and into the second quarter of 2026, we deliberately chose not to replace many of them with new multi-year bonds.
Interest rates had declined substantially from their previous highs, and we believed several economic factors suggested a better-than-average probability that longer-term rates would rise again.
Rather than lock in what we considered relatively unattractive yields, we parked the proceeds in money market funds and waited.
We weren't abandoning fixed-income investing. We were preserving flexibility.
What We Are Doing Now
Since May 2026, longer-term interest rates have risen significantly, and attractive opportunities have begun reappearing in the CD and Treasury markets.
With some CDs and Treasuries offering yields around 5% again, we have resumed extending our ladders, generally into the three-to-five-year range.
However, we are not equally weighting each rung this time.
Because we believe there remains a meaningful possibility that rates may continue rising, we are keeping the bulk of our fixed-income allocations in the zero-to-two-year maturity range, with progressively smaller allocations extending into years three through five.
This positioning allows us to capture attractive yields today while preserving substantial liquidity to take advantage of potentially higher rates tomorrow.
If yields eventually climb into the 6% to 7% range, I wil likely become more aggressive about extending maturities, potentially as far as seven years, while distributing allocations more evenly across the ladder.
Conversely, if rates decline, we will have benefited from locking in some higher yields without having committed our entire fixed-income allocation.
That is dynamic bond laddering. I believe we have coined term.
But Isn't This Market Timing?
One of the most common criticisms of our approach is that attempting to anticipate interest rate movements is market timing, and everyone knows market timing doesn't work.
I respectfully disagree.
The stock market may reasonably be characterized as following a random walk, making short-term price movements extraordinarily difficult to predict consistently. But the bond market is different.
Interest rates are influenced by observable economic forces, including inflation, Federal Reserve monetary policy, government borrowing, and the supply and demand for credit.
In my nearly 40 years as a financial planner, I have found that it is generally much easier to form a reasonable opinion about the direction of interest rates than the direction of stock prices.
Sometimes the outlook is particularly clear. Consider 2021, when three-month Treasury bills were yielding effectively zero and even 30-year Treasuries were yielding less than 2%.
I wrote several articles at the time warning investors about the risks of owning long-term bonds. As I said then, you didn't have to be Nostradamus to recognize that interest rates had very little room to fall and substantial room to rise.
That wasn't sophisticated market timing. It was common sense.
Other times, the outlook is less obvious. When we established our bond ladders in 2022 and 2023, I was less certain about where rates would go next. Consequently, we distributed our investments relatively evenly across maturities.
Today, my assessment is different. I see relatively few compelling reasons for longer-term interest rates to decline significantly and several reasons they could continue rising. That is why we are deliberately overweighting the shorter maturities of our ladders.
Of course, we won't always get the direction or timing exactly right. But the notion that interest rate movements are so utterly unpredictable that investors should ignore prevailing economic conditions and blindly reinvest maturing bonds at predetermined intervals strikes me as naive.
Dynamic laddering isn't about predicting the future with certainty. It's about recognizing when the odds appear to favor one direction over another and positioning our bond portfolios accordingly.
What Happens When We Get It Wrong?
Of course, we don't always correctly anticipate the direction or timing of interest rate movements.
No one does.
But here is what I believe critics of dynamic laddering often overlook: When implemented prudently, the financial cost of being wrong is generally modest.
If we keep maturities short in anticipation of higher rates and rates instead decline, we may miss an opportunity to lock in higher yields for longer periods. That is an opportunity cost, not necessarily a capital loss.
I have been managing other people’s money for a very long time, and if there is one thing I have learned it is that consumers feel pain from capital losses and are generally forgiving missing out on capturing the very peak of interest rates.
Conversely, if we extend maturities and rates subsequently rise, the market values of those bonds may temporarily decline. However, assuming no default, we can still hold our individual Treasuries and CDs to maturity and receive the contractual principal and interest.
By limiting maturities, avoiding bond funds, and maintaining adequate liquidity, we substantially reduce the consequences of imperfect interest rate forecasts. Consumers tend to grasp this concept easily. Most are willing and able to hold a bond or CD for 4-5 years to get their money back. 10-20 years or more is just too long to wait.
The Bottom Line
At Financial Planning Hawaii, we don't believe fixed-income portfolio management should be an exercise in blindly following a predetermined formula.
Interest rates change. Economic conditions change. The compensation investors receive for extending maturities changes.
Our bond ladders should change, too.
Dynamic laddering doesn't require us to predict interest rates perfectly. It simply requires us to recognize when the risk-reward tradeoff is favorable, when it isn't, and to manage maturities accordingly.
To me, that isn't market timing. It's prudent fixed-income management.