Is Laddering a Good Stock Investment Strategy?

Your retirement is something not to mess with, so finding a steady stream of investment revenue can provide stability during your retirement years. The laddering investment strategy delivers a consistent stream of passive income annually. Laddering can be an excellent tool to minimize risk and take advantage of yearly interest rates. Using this strategy can help you overcome market fluctuations with more secure investments, such as annuities, bonds, and certificates of deposit (CDs).

Key Takeaways

• Laddering involves making several investments of the same type, for example, bonds and annuities. Each investment has a different maturity rate, such as monthly or yearly.
• There are many laddering strategies, including bond laddering, but they all rely on the same foundation of having different investments paid out after a set period.
• Many investors opt to reinvest profits as their investments mature to increase their long-term financial growth potential.
• While laddering may have a higher initial cost than a lump sum investment, this strategy provides yields at more reasonable time frames, letting you take advantage of the convenience of short-term investments and experience the benefit of long-term investments.

What Is Laddering?

Laddering is an investment strategy that aims to increase a steady stream of cash flow with a lower risk in relation to interest rates by investing large sums in various increments rather than one larger lump sum into one account. Investors use many laddering strategies to increase the chances of a specific outcome. Some common laddering strategies include the following:

Monthly Bond Laddering

Many bonds pay income on a semiannual or annual basis. Selecting six specific bonds that pay interest in different months will create a monthly income stream to supplement your retirement income or provide an opportunity for reinvestment. You can also customize your bond portfolio for your individual situation, aligning with your existing budget.

Systematic Investing

Those who do not have enough funds to build a complete ladder but can invest in a rung each year should begin in the middle of the ladder and expand from there. For example, they can invest in a $50,000 bond that matures in three years and then branch into two-year and four-year bonds. This type of investing enables long-term investors to capitalize on swings in interest rates, thus improving returns.

Bond Laddering

Bond laddering involves buying bonds with different maturities in the same portfolio. This combination enables investors to benefit from higher returns associated with longer-term maturities while minimizing risk with shorter-term bonds. For example, buying a bond that matures in two years and one that matures in five years lets you minimize risk proportionate to the interest rate curve. If the two-year bond matures when interest rates rise, you can then reinvest it in a higher-yield bond.

Annuity Laddering

Similar to bond laddering, this type involves purchasing immediate annuities over a period of years to ensure an income while minimizing risk. This strategy enables investors to maintain a certain level of investment in equities and bonds while allocating other funds to purchase annuities.

How Does Laddering Work?

Laddering for people on a fixed income works similarly to traditional laddering techniques but focuses more on minimizing risk. Financial products for this strategy typically include annuities, bonds, and CDs. Employing laddering techniques allows investors to optimize cash flows that provide a steady income stream outside of a fixed income, such as Social Security payments and pension checks. Having another income stream can enhance an individual’s financial security and provide long-term stability for retirement.

Benefits of a Laddering Investment Strategy

There are several benefits of using a laddering investment strategy versus other strategies. Understanding this strategy’s benefits and challenges can help you decide how to invest your assets effectively. The following are some benefits to consider:

Results in Reliable Returns

In the long term, this investment strategy provides consistent income streams as each investment matures. Each time your annuity, bond, or CD reaches maturity, you can choose to take some of that resulting profit as your income and reinvest the rest in a long-term investment.

Enhances Liquidity

Rather than having all your assets in one long-term investment, where you cannot withdraw funds or otherwise face a penalty for pulling funds early, laddering your investments means you always have something close to its maturity date. Waiting for that single investment to mature can provide immediate funds. Alternatively, if you need to withdraw funds early, you pay a penalty on only a smaller portion rather than a larger lump sum like you would on a single investment.

Provides Passive Income

Passive income is crucial to building your net worth or having income during retirement. This income prevents you from having to seek work or part-time gigs after reaching retirement age, so you can simply enjoy your retirement rather than having to balance work with the rest of your life.

Challenges of Using This Strategy

Every investment strategy has its challenges, and laddering is no exception. Understanding these challenges beforehand can help you plan ways to overcome or prevent them. The following are some common challenges some face with this strategy:

Increased Initial Expense

An effective laddering strategy includes many smaller investments made simultaneously with differing maturity rates. Allocating funds to each smaller investment incurs a higher upfront cost, which can amount to a greater total than if you invest a single lump sum. Also, some investments require someone else to set them up for you, which may mean additional fees or markups. For example, if you opt for bond laddering, you may have to pay a 2% markup.

Additionally, your ladder strategy must be actively managed to navigate the changing markets effectively. Therefore, you may benefit from professional services. However, these services require a commission, which can decrease your returns. Having a large nest egg and researching different broker firms can help you allocate your resources to many financial products and define what fees or markups you might face with various brokerages.

Affected by Inflation

Sometimes, your laddering strategy might not keep up with inflation rates, which can diminish your returns. Timing is essential to maximizing your investments and creating profits rather than losses. Having expert market advice or attending workshops, such as those offered by Infinity Investing, enables you to better navigate potential inflation rates as your investments reach maturity.

Potential Need To Cash Out Early

As with any investment involving larger sums of money, the potential need to cash out early always exists. This situation involves withdrawing your investment funds before they reach maturity. Consequently, you may face a fee or penalty for pulling these funds. It may also result in a smaller return than if you leave the funds in the account. Moreover, this affects your ladder’s long-term effectiveness, as you will have to wait until your next investment reaches maturity, which is even longer.

Using Laddering as a Part of Your Retirement Planning

Using laddering as your retirement planning strategy with Infinity Investing can help you develop the right investment portfolio to secure your retirement’s future. Learning about different types of stock investing strategies can allow you to determine which strategy works best for you, your assets, your risk acceptance, and your future. Learn more about Low Risk Investments.

Laddering Example

Sabrina and Chris are nearing retirement age and want to secure their financial future in their retirement besides Social Security payments and a pension. Collectively, they saved $750,000 in assets that they want to invest in less volatile investments. They opt for a bond laddering strategy to offer a consistent income stream and more reliable returns. Their breakdown is as follows:

• $150,000 in a bond that matures in one year.
• $150,000 in a bond that matures in two years.
• $150,000 in a bond that matures in three years.
• $150,000 in a bond that matures in four years.
• $150,000 in a bond that matures in five years.

After the first bond matures, they take what is necessary for their finances and reinvest the rest in another five-year bond, which would mature one year after their initial five-year bond. This strategy provides them with a steady income that matures yearly. As each bond matures, they can take the profit according to their financial needs and reinvest the rest in another five-year bond.

Laddering your investments as you approach retirement can unlock a steady stream of passive income if you know how they work. As you build your wealth, having a reliable income source lets you stress less about your financial future and enjoy your retirement years. To develop your understanding of various investment strategies, including laddering, sign up for our Infinity Investing Workshops, where we discuss this concept.