How to Build a Bond Ladder That Can Rival the S&P 500 This Decade

With the post-pandemic yield environment settling higher than the prior decade, investors can use a disciplined bond ladder to capture attractive income, control volatility, and potentially outpace long-only equity returns over the remainder of this decade. A bond ladder staggers maturities across short, intermediate and long-term instruments so cash flows from maturing bonds are regularly reinvested at prevailing yields. That reinvestment potential is the ladder’s primary advantage in a rising-rate or range-bound market.

Start by defining goals and time horizon. If you need liquidity at regular intervals — for living expenses or planned withdrawals — allocate accordingly to short-term rungs (1–3 years). For higher yield and inflation sensitivity, include intermediate (3–7 years) and long-term (7–20 years) rungs, weighting each by your risk tolerance.

Select issuers and instruments: high-quality U.S. Treasuries provide capital preservation and low credit risk; investment-grade corporate bonds add pickup for modest additional risk; municipal bonds can be efficient for taxable accounts. Use ETFs for broad exposure and ease of trading, or buy individual bonds to hold to maturity and lock coupon payments.

Construct an example ladder: with $100,000, buy equal amounts in 1-, 3-, 5-, 7-, and 10-year maturities. As each rung matures, reinvest at the longest rung to maintain the ladder’s span and capture current yields. Rebalancing annually and monitoring duration exposure helps manage interest-rate risk.

Compare to equities: a ladder won’t match equities in a sustained bull market, but it often outperforms when stocks underdeliver or during periods of higher inflation and slower growth. The ladder’s steady income and principal return at maturity lower drawdown risk, which can produce superior risk-adjusted returns versus the S&P 500 in certain multi-year scenarios.

Risks and implementation notes: be mindful of inflation erosion, call risk on some corporates, credit risk for lower-grade holdings, and tax implications for munis and corporates. Consider laddering within tax-advantaged accounts for bonds with taxable coupons.

A thoughtfully built bond ladder is a pragmatic tool for investors seeking reliable income and capital stability. With disciplined reinvestment and issuer selection, it can be a competitive core strategy alongside equities for the decade ahead.