Laddering
Encyclopedia
Laddering is an investment
technique that requires investors to purchase multiple financial products with different maturity
dates.
, the more stable your yield, and the higher your average yield. For example, a person has both a 2015 matured CD
and a 2018 matured CD. Even if the interest rate
drops fairly low in 2015 when one certificate is to be renewed, half of the income is locked in until 2018.
Laddering can free up capital as needed. A person may purchase a shorter term bond
in the event that he needs the capital soon to fund his children's tuition
while purchasing other longer term bonds that mature later as retirement spending in a more favorable rate, assuming the economy is experiencing a normal yield curve
during this time.
Laddering can also be used as an overall retirement planning approach for all of your retirement investments. The idea is you separate your CD's, cash, 401K, annuities, etc. into different "ladders" or "buckets" or "baskets" depending on the when the asset is expected to be liquidated to fund the retirement revenue stream. Low risk assets that you plan to first use at retirement usually have an expected lower rate of return. Higher risk assets would be placed in a basket used at the end of retirement.
This strategy provides a solid framework for investing for retirement. There are software packages available to help aid retirement planning using laddering strategies such as www.NestEggSoftware.com
s to buy at the lower price, with a guarantee that they will be able to sell at a higher price. This practice is illegal.
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
technique that requires investors to purchase multiple financial products with different maturity
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
dates.
Benefits
Laddering avoids the risk of reinvesting a big portion of assets in an unfavorable financial environment. Each "rung" of the ladder is a bond of a specific maturity date and the "height" of the ladder is the difference between the shortest maturity bond and the longest maturity bond. The more rungs in your ladder (10 or more is best), the better the diversification diversificationDiversification
Diversification may refer to:* Diversification involves spreading investments* Diversification is a corporate strategy to increase market penetration...
, the more stable your yield, and the higher your average yield. For example, a person has both a 2015 matured CD
Certificate of deposit
A certificate of Deposit is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions....
and a 2018 matured CD. Even if the interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
drops fairly low in 2015 when one certificate is to be renewed, half of the income is locked in until 2018.
Laddering can free up capital as needed. A person may purchase a shorter term bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
in the event that he needs the capital soon to fund his children's tuition
Tuition
Tuition payments, known primarily as tuition in American English and as tuition fees in British English, Canadian English, Australian English, New Zealand English and Indian English, refers to a fee charged for educational instruction during higher education.Tuition payments are charged by...
while purchasing other longer term bonds that mature later as retirement spending in a more favorable rate, assuming the economy is experiencing a normal yield curve
Yield curve
In finance, the yield curve is the relation between the interest rate and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. For example, the U.S. dollar interest rates paid on U.S...
during this time.
Laddering can also be used as an overall retirement planning approach for all of your retirement investments. The idea is you separate your CD's, cash, 401K, annuities, etc. into different "ladders" or "buckets" or "baskets" depending on the when the asset is expected to be liquidated to fund the retirement revenue stream. Low risk assets that you plan to first use at retirement usually have an expected lower rate of return. Higher risk assets would be placed in a basket used at the end of retirement.
This strategy provides a solid framework for investing for retirement. There are software packages available to help aid retirement planning using laddering strategies such as www.NestEggSoftware.com
Other Usage
Laddering also describes a process where, in order to purchase shares at a given price, investors must also agree to purchase additional shares at a higher price. This artificially inflates the price of the stock and allows insiderInsider
An insider is a member of any group of people of limited number and generally restricted access. The term is used in the context of secret, privileged, hidden or otherwise esoteric information or knowledge: an insider is a "member of the gang" and as such knows things only people in the gang...
s to buy at the lower price, with a guarantee that they will be able to sell at a higher price. This practice is illegal.