Laddering is an

investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

technique that requires investors to purchase multiple financial products with different maturity dates.

Benefits

Laddering avoids the risk of reinvesting a large 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 the ladder (10 or more is recommended), the better the

diversification Diversification may refer to: Biology and agriculture * Genetic divergence, emergence of subpopulations that have accumulated independent genetic changes * Agricultural diversification involves the re-allocation of some of a farm's resources to ...

, the more stable the yield, and the higher the average yield. For example, a person has both a 2015 matured CD and a 2018 matured CD. Even if the

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

is 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 or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemica ...

in the event that he needs the capital soon to fund his children's

tuition Tuition payments, usually known as tuition in American English and as tuition fees in Commonwealth English, are fees charged by education institutions for instruction or other services. Besides public spending (by governments and other public bo ...

while purchasing other longer term bonds that mature later as

retirement Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload. Many people choose to retire when they are elderly or incapable of doing their j ...

spending with a more favorable rate, assuming the economy is experiencing a normal

yield curve In finance, the yield curve is a graph which depicts how the yields on debt instruments - such as bonds - vary as a function of their years remaining to maturity. Typically, the graph's horizontal or x-axis is a time line of months or ye ...

during this time. Laddering can also be used as an overall retirement planning approach for all retirement investments. The idea is to separate CDs, cash, bonds, annuities, and others into different "ladders" (or "buckets" or "baskets") depending on when the asset is expected to be liquidated to fund the retirement revenue stream. Low-risk assets are used at the start of retirement (and usually have an expected lower rate of return, due to lacking a

risk premium A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less t ...

). Higher-risk assets would be placed in a basket used at the end of retirement. This strategy is useful for a diversified portfolio, with other assets in the stock market etc. Generally an initial investment of $10,000-$20,000 is required in order to purchase 5-10 bonds with different maturities for a specific timeline.

IPO laddering

''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 insiders to buy at the lower price, with a guarantee that they will be able to sell at a higher price. This practice has resulted in investigations of national and global banks by the SEC after the stock market collapse.

References

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