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Krista Biernbaum

October 09 , 2017

Investment Basics: Laddering: Fending Off Fluctuating Rates

Investment Basics: Laddering: Fending Off Fluctuating Rates

Fixed income investments aren’t immune to market conditions. Fluctuating interest rates can have a negative effect on bond returns. Laddering is a strategy that offers investors some protection.

Laddering Defined

When you ladder your bond investments, you divide your investment dollars among bonds having progressively longer maturities. By staggering the dates that bonds are due to mature, you can help reduce risk and potentially lessen the impact of rising and falling interest rates on your returns.

The Problem

The longer the bond’s term, the more vulnerable it is to changing interest rates. Suppose you invested $10,000 in a bond that yields 3% annually. But when the bond matures, interest rates have dropped, and the annual yield on a new bond is only 1.5%. If you reinvest your money in a single bond at the lower rate, you’ll earn significantly less interest than you were earning before. And, if interest rates rise again after you buy the new bond, you’ll still be earning the lower rate until the bond matures. You could sell the bond, but you would probably have to sell it at a loss.

The Solution

Instead of purchasing a single bond when the original bond matures, consider using the proceeds to create a “bond ladder.” By investing in multiple bonds that mature at different times, you’ll have bonds coming due every few years. As each bond matures, you reinvest the money. If interest rates are up, you’ll be able to take advantage of the higher rates. If rates have fallen, you’ll still have bonds that are earning the higher interest rate.

Take the Same Approach

Laddering also works for certificates of deposit (CDs). Build your ladder by investing in multiple CDs that mature at different times. As each CD matures, reinvest the proceeds in a new CD having the longest maturity to keep your ladder going.

If you have any questions laddering your investments, contact a Security National Bank Wealth Management advisor to learn more.

Bank CDs are insured and offer a fixed rate of return, whereas both principal and yield of securities will fluctuate with changes in market conditions.

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