Many investors rely on a fixed income while juggling fluctuating interest rates. Due to the current low interest rate environment, this can prove to be quite challenging. An easy and effective investment approach, referred to as laddering, may lead to enhanced returns and help avoid significant income loss due to changes in interest rates.
A laddered investment approach is based on allocating portions of your total investment and staggering maturity dates so that each portion of your portfolio matures at regular intervals. Each rung of the ladder represents a specific maturity date. The more “rungs” you have the more you reduce your exposure to interest rate fluctuations, and thus potentially earn higher than average yields. Laddering allows you to receive the benefit of earning the higher interest rates of longer term investments while still enjoying some liquidity.
Here’s an example of how laddering can work: Rather than investing $60,000 for a one-year period and renewing each year at the often lower one-year rate, you could create a three-year ladder and put $20,000 in a one-year investment, $20,000 in a two-year investment, and $20,000 in a three-year maturity at probable higher interest rates. After the first year, you would take the maturing one-year investment and purchase a new three-year investment. After the second year, the initial two-year investment matures and you would purchase a new three-year investment. Do the same with the initial three-year investment. Starting in year four, all of your investments will be earning the higher three-year rate. Additionally, you would have access to a third of your principal as it matures each year.
Using this laddered approach, you may achieve more consistent returns over the long term, even if interest rates fluctuate.
To learn more about laddering and how it can work for you, call toll-free at 866.621.1787 to speak to an AGFinancial investment consultant. Together, we can customize a laddering strategy that best fits your needs and goals.
