Most Investors Are Missing This Simple Strategy to Minimize Risk and Maximize Returns

I’m a chartist, but right now, my favorite chart is a table outlining current bond yields. Simply put, this tells me everything I want to know about where conservative returns are right now. It sure isn’t in covered call exchange-traded funds (ETFs), a suddenly discounted SpaceX (SPCX) or Oracle (ORCL), or in anything related to artificial intelligence (AI).

To me, it is about the generationally high fixed rate of return on bonds. In particular, zero-coupon U.S. Treasury bonds, which pay cash interest to holders every six months. Zeroes, in contrast, involve investing an amount of money now, with the promise from the U.S. government that you will be paid a specific dollar amount on a specific date.

Let’s take a simple example. A 10-year zero is yielding around 4.78%. That return can be secured in that if you invest $630 now, you will get back $1,000 around this time in the year 2036. I own a whole ladder of bonds like this, maturing from 2029 all the way out to 2049. 

So I know that during those 20 years, I have money coming in, just like a second Social Security or pension check. And I built it and customized it all by myself for my specific needs, right in my brokerage account. No annuity or insurance companies involved, no brokers or advisors, no buffered or covered call income products. 

That said, with this as a core portfolio, I can do whatever else I want. But this money is spoken for. My mission for the rest of my portfolio — beat that 5% return without taking massive risk. But I can take a lot more risk than I would if 100% of my retirement capital was “up for grabs” in the stock market. 

I have analyzed and managed money in the stock market since the 1990s. But algorithms and indexes now control the landscape there. Thus, my ability to control my own destiny in that arena is something I judge to be at an all-time low. That’s why I talk so much about hedging here. 

Let’s take a step back now. Building a bond ladder simply means spreading your money across government bonds that mature at different times — like buying bonds that come due in one, three, five, 10, and 20 years.

How to Protect Yourself If Rates Keep Rising

The biggest fear with locking up money long-term is that interest rates might jump higher, making older bonds lose temporary market value.

You can protect yourself against that risk using simple hedges:

1. Short Funds (Inverse ETFs): Funds like the Short 20+ Year Treasury -1X ETF (TBF) or the Ultrashort Lehman 20 Year Treasury -2X ETF (TBT) are designed to go up when bond prices fall. Holding a small amount alongside your ladder creates a built-in cushion.
2. Yield-Boosting ETFs: Funds like the iShares 20+ Year T-Bond Buywrite Strategy ETF (TLTW) hold long-term government bonds and sell option contracts against them to pay out extra monthly cash, softening the impact of rising rates.
3. Put Options: A basic put option on a bond fund like TLT acts like an insurance policy, turning into cash profit if bond prices drop.

If interest rates go up, your hedges make money to offset the paper loss on your bonds. Meanwhile, your underlying bond ladder stays intact, quietly marching toward its guaranteed payout date.

What Happens If a Recession Hits?

If the economy slows down and a recession hits, the Federal Reserve usually cuts interest rates quickly. When interest rates drop, existing bond prices shoot straight up.

If that happens, you win twice. You can sell your bonds early for a profit. Or, you can do nothing and continue collecting your 5%-ish return, enjoying a high yield while everyone else gets stuck with low interest rates.

Setting up a bond ladder isn't complex Wall Street magic. It is simply securing a guaranteed income stream, protecting your principal, and taking control of your financial timeline.

I’m intrigued by the whole bond yield curve, from a few years out through 30 years to maturity in 2056. Whether I’m around that long or not. Because zeroes make a nice legacy too. Imagine retiring and thinking, “I’ll just leave my stock portfolio to my kids and grandkids, and some charities.” Then, by the time they get them, the assets have been devalued in a recession by 30% to 50%. With a zero-coupon U.S. Treasury bond ladder, that can only happen if the U.S. government can’t pay me when the bonds, which essentially are debt contracts, are due. If that type of non-payment situation ever occurs, I feel comfortable predicting it would not be at the top of our list of issues! The rest of the global markets would be rendered fairly useless.

I am a bond ladder fan. But as shown above, rates have been so low for so long, DIY investors don’t know much about them. They haven’t had to. That should change.

Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.