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With interest rates a hot topic right now, it's important to understand how they affect your investments. If you're a bond investor, you may know how interest rates affect your investments and you may have had some experiences with them. In case you are not familiar with how interest rates affect bonds, here's a brief explanation: If you buy bonds when interest rates are low and then the rates rise, you now have a lower return. If you buy bonds when rates are high and sell when rates are low, you will have a greater return.
Normally, if your bonds mature when rates are low and you wish to reinvest the money then, you would end up buying at the low rates, thus limiting your return if interest rates go up in the future. But when you use laddering, only the bond that matures will be affected. You could sell the bond and reinvest the money at low interest rates or you could choose another investment such as stocks or mutual funds. Because that is the only bond that matured, your other investments may not be hurt because the interest rates may recover by then and you could reinvest the money at higher rates.
Besides the interest rate advantages that laddering offers investors, this technique also gives you a regular source of income. As each bond matures, you can put the money into a liquid account like a bank account and use it for living expenses. If you plan the maturity dates correctly, doing this may prevent you from having to sell investments that are continuing to provide you with income like stocks and mutual funds.
As you can see, laddering provides an investor with many advantages. By using this method, you can limit the effect of interest rates on your overall investment plan and maximize your returns over the long term which is always great for any investor.
There is a technique known as laddering that will help lower the risk that is incurred with interest rates and bonds. Laddering is a technique in which you purchase bonds with different maturity dates. As each bond matures, you can reinvest the money. This prevents you from the risk of investing all your money when rates are low.
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