4 Advantages of Laddering

Laddering is a technique that is commonly used with several different types of investments. With this strategy, an investor is going to purchase multiple investments with different dates until maturity. Here are some of the advantages of laddering.

1. Frees Up Capital

One of the biggest advantages of using this technique is that it will help free up capital. Many investors will put all of their money into one bond or one CD. This ties up their investment capital for a specific amount of time. By purchasing smaller bonds or CDs with varying maturity dates, you will be able to receive some of your capital in the short term. If you have an immediate need for capital, this can be a good way to set up your investments. 

2. Avoid Penalties

CDs are notorious for charging early distribution penalties if you try to cash them out before they mature. This causes many investors to lose money when they have some type of emergency come up. If you utilize a laddering technique, you can avoid this problem. By setting up a CD ladder, you could always have some cash that will be available, and you will be able to decide what to do with it. If you have an immediate need, you can use it to purchase something. If you want to reinvest it, you will have that option as well.

3. Lower Risk

By utilizing this strategy, you will be able to avoid losing everything during poor economic times. This type of strategy is going to spread out your investment over a long period. This means that some cash will become available soon, and some is going to become available later on. Instead of putting all of your money into the market at once, you are going to spread out your investment and ease it into the market. This cuts down on the impact of interest rate risk, and it also protects you from big economic changes. 

This strategy is going to help you avoid reinvestment risk as well. For example, if economic conditions are unfavorable when you receive your payments, you would be reinvesting into a market that is not going to pay you suitable returns. However, if you ladder your investments, you are going to be able to save some of your money for more favorable conditions.

4. Reinvestment

Another advantage of this strategy is that you are going to be able to reinvest the returns that you receive into other investments. Many people do this with bond coupon payments. As soon as they receive a coupon payment, they will take the money and put it back into the market in some capacity. This has the ability to multiply your returns and grow your portfolio substantially in a very short time. By getting in the habit of systematically reinvesting the money that you receive back from your ladder investments, you will be able to become very successful in this area.

blog comments powered by Disqus
Scottrade