The term fixed income strategy refers to several options an investor has when purchasing securities such as bonds. The three primary fixed income strategies include ladders, barbells, and bullets.
Explanation
Investors have several strategies they can use when purchasing fixed income securities such as bonds. Each of these strategies supports a different investment objective through the purchase of securities with various maturity dates. While under certain conditions the investor may choose a hybrid approach, the three principal fixed-income strategies include:
Bullet Strategy: involves the purchase of fixed income securities that mature in the same timeframe. This strategy is oftentimes used by investors that need funds on a known date in the future.
Barbell Strategy: involves the purchase of fixed income securities with both long and short term maturities. This strategy typically applies to bonds, and is thought to provide the investor with a portfolio that balances risk and reward. The best time to employ the barbell strategy is when interest rates are on the rise. The long-term bonds will provide the investor with a stable source of income, while the short-term bonds allow the investor to capture higher rates of interest.
Bond Laddering: involves the purchase of fixed income securities with dissimilar maturity dates. By dividing a portfolio among a series of bonds with varying maturities, the investor can minimize interest rate risk and increase their portfolio's liquidity. Laddering is achieved by purchasing a series of bonds evenly spaced across the investor's desired liquidity timeframe.
The term harvest strategy refers to the planned discontinuation of new investments in a line of business or product so the maximum profits can be extracted from it. Harvest strategies are oftentimes used when a product is nearing the end of its lifecycle, or the usefulness of a service is nearly over.
The term Halloween strategy refers to the selling of stock before May and not investing in equities again until the end of October. The Halloween strategy is based on a theory that the months of November through April provide investors with stronger capital gains than the remainder of the year.
The term exit strategy refers to a process by which an owner plans to withdraw their investment in a business. Exit strategies are important to venture capitalists, since extracting their money from a business allows them to reinvest those funds elsewhere.
The term event-driven strategy refers to an investment approach that attempts to exploit pricing inefficiencies that occur after significant corporate announcements. Event-driven strategies are used by large institutional investors when a company notifies the public of plans that will impact their future earnings potential.
The term bullet strategy refers to an investment approach involving the purchase of fixed income securities that mature in the same timeframe. The bullet strategy is oftentimes used by investors that need funds on a certain date.
The term bond ladder refers to an investment strategy involving the purchase of fixed income securities with staggered maturity dates. The bond ladder strategy helps investors to manage interest rate risk and provides them with the opportunity to make a series of reinvestment decisions over time.
The term barbell strategy refers to an investment approach involving the purchase of fixed income securities with both long and short term maturities. The barbell strategy typically applies to bonds, and is thought to provide the investor with a portfolio that balances risk and reward.