A laddered portfolio has more reinvestment risk in any single year compared to barbell portfolio. False.
Can someone explain how.?
Because unlike in a laddered where you have equal exposure to short, medium and longer term bonds, in a barbell you have a heavier exposure to longer term bonds. This heavy exposure to a 30 year bond (example) makes you more susceptible to reinvestment risk since there would be multiple phases your economy would go through, which would have a material impact on the yields of such bonds, since these bonds would mature only after 30 years. Hence, the higher reinvestment risk.
Okay got it now.
In a laddered portfolio since there are multiple cash flows it can be reinvested at different times and the reinvestment risk kind of offsets each other.
But in a barbell portfolio that is obviously not the case.
Thanks!
in a barbell portfolio 50% weightage is invested in short term duration bonds and remaining 50% invested in long term bonds. Due to the higher risk associated with short term bond cash flow reinvestment, it naturally become more riskier in term of reinvestment at early period.
Whereas in laddered portfolio cash flows are evenly distributed and reinvestment of cash flows are made every year so if one year rates are low the same can be mitigated next year.
Also note that the total portfolio bond duration is a constant i.e. it will remain the same for both these portfolios.
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