Laddered Investment Strategy
When investing, it's easy to forget the importance of structuring your portfolio to meet your particular goals. There are multiple methods to structuring your portfolio, but one of the most effective ways is a laddered investment strategy. This approach can lead to greater returns and help avoid significant losses due to market changes.
If you are wondering whether this method is right for you, you’ll first need a deeper understanding of how to approach this strategy, as well as the pros and cons. We can also help you understand how you can achieve a laddered strategy with Connect Invest Short Notes.
What is a Laddered Investment Strategy
A laddered investment strategy is an approach based on allocating portions of your total investment at different times (rather than investing everything all at once), thereby creating staggered maturity dates. This allows your returns to mature in regular intervals. Each “rung” on your ladder represents a different maturity date, and this mitigates your risk for losses on returns due to interest rates and market fluctuations. Laddering also gives you the potential to earn higher interest rates on your investments over the long term while still receiving some liquidity.
Laddering can work well with many investment types including bonds, certificates of deposit, Treasury securities and Short Notes.
How to Build a Laddered Investment Strategy That Works
To stagger your investment maturity dates, the total amount of your investment capital will be split into different portions. Each portion will be invested at the corresponding interest rate in a different term. As each portion matures, the returns can be reinvested in another term. This approach allows you to control the ladder's height and the amount of capital you invest at a time, and it gives you the option to strategically reinvest some or all of your return from different terms.
The ladder's height is determined by the distance between the “rungs.” The distance between rungs is determined by the period between the maturity dates of the respective investments, which can range anywhere from a few months to years. The longer the rungs, the higher the return if you are investing in funds that have proven to increase over time. Decreasing the distance between rungs can establish more liquidity, but it does reduce the average return.
The laddered approach comes with benefits and drawbacks that should be considered before deciding if this is the right investment strategy to meet your long and short-term financial goals.
Drawbacks of Laddering
There is no fool-proof investment strategy. Like any other strategy, the laddered approach has drawbacks and potential risks. The risks vary depending on the type of investment. With bonds being the most used investment type with the laddered strategy, there are interest rate and inflationary risks to be considered.
Ladders are Expensive
The laddered strategy can be expensive because for it to be effective, a larger sum of money needs to be invested over the long term. With bonds, in particular, your ladder will likely need to be set up by a broker, which can lead to paying markups of up to 2 percent. For the ladders to reach maturity, they will need to be actively managed, meaning a commission will further decrease your returns.
Not Reaching Maturity
Ladders can be negatively affected by emergencies. Sometimes it is not possible to hold an investment until maturity. You may experience an unexpected medical bill or need quick cash to pay for an urgent matter. Exiting or selling an investment can not only be difficult but expensive. If the market value drops below the amount you purchased the asset for, you will lose out on returns and rungs on your ladder.
Generally, with interest-bearing funds, your earnings may not keep up with inflation. Therefore, the amount you will earn through interest and returns in the future may be worth less than what you can purchase with the same amount today—making timing on each rung a key factor.
Benefits of Ladders
Consistent Long-Term Returns
The laddered fixed-income portfolio approach allows you to minimize the risk associated with both short-term and lump-sum investing. For instance, if interest rates are falling, the long-term nature of the ladder would be beneficial, where some of your money is locked in for many years. The safety provided through this approach will be integral to the growth of your portfolio.
A laddered strategy adds an element of liquidity to a portfolio. Assets like bonds, treasury securities, etc. are not considered liquid investments because they cannot be cashed in at any time without penalty. By buying different portions of an asset with varying maturity dates, the investor guarantees that cash is available within a reasonable time frame.
One of the significant advantages of building a ladder is having a relatively reliable source of passive income which can help during periods of economic turmoil like we are experiencing now, or work as part of a retirement strategy.
The Laddered Investment Approach with Short Notes
By structuring a laddered portfolio with Short Notes, you may achieve more consistent returns over the long term while having access to cash, and you may also have a reliable source of passive income.
Over the period of your investment, Short Notes automatically earn interest and principal payments. Our interest rates are 5.5%, 7.25%, or 9.0%, with maturities of six, twelve, and twenty-four months. The interest will be accrued either on the 1st or 15th of each month, depending on when your investment cycle started. Upon the maturity of your Short Note, you will be paid out your invested principal in full.
For example, imagine you have $20,000 to invest in equal portions in Short Notes using the laddered strategy over a period of four years. To create a ladder with eight rungs, you would be investing $2,500 twice a year over the four-year term. Each rung will have different maturities and corresponding annual interest rates, which will help to mitigate risk and act as a hedge. You can continue to reinvest each maturing portion and fixed income into the next rung or the following laddered term that you can decide on as your objectives and needs change.
Does the laddered investment strategy sound like the ideal approach for you? The ease and accessibility of our Short Notes allow you to customize a laddering strategy that best fits your needs and goals. Sign up and get started on building your investment ladder.