Laddering

Laddering

Laddering is an investment technique that requires investors to purchase multiple financial products with different maturity dates.

Benefits

Laddering avoids the risk of reinvesting a big portion of assets in an unfavorable financial environment. For example, a person has both a 2015 matured CD and a 2018 matured CD. If the interest rate drops fairly low in 2015, 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.

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 insiders to buy at the lower price, with a guarantee that they will be able to sell at a higher price. This practice is illegal.

References

* [http://financialplan.about.com/cs/investing/a/LadderingCDs.htm Laddering Certificates of Deposit]
* [http://www.schwab.com/public/schwab/research_strategies/bonds_fixed_income/laddering?cmsid=P-981774&lvl1=research_strategies&lvl2=bonds_fixed_income Bond Laddering] Charles Schwab Corp. website.


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