Strategy Investing

The Ladder Solution

Since longer term portfolios provide higher yields with less liquidity and shorter term portfolios provide more liquidity but with less yield, investors are faced with a yield/liquidity trade-off. Compounding this difficult trade off is interest rate uncertainty. Will interest rates go up, down or stay the same? Because investors cannot predict future rates, investors need a time proven strategy to create a portfolio that provides liquidity and yields consistent with their risk tolerance.

The ladder strategy is the solution. Simply by initially staggering duration (laddering), it is possible to optimize both liquidity and yield. One simple solution is to use 3 and 5 year duration portfolio. For example: an investor puts half of the portfolio into a 3 year duration and the other half into a 5 year duration and once the 3 year matures, reinvest for 5 years. Over a ten year period half the investment is liquid in the 3rd year, 5th year, 8th year and 10th year while after the initial 3 year period all of the investment is earning the higher 5 year rates. Use the interactive calculator below to illustrate the benefits of laddering.

For:
Prepared By:
3 Year Rate
5 Year Rate

3 & 5 Year Ladder

Total
End of year
1 3 year term 5 year term
2
3
4 5 year term
5
6 5 year term
7
8
9 5 year term
10

Annuities are intended as long-term savings vehicles. The annuity is not guaranteed by any bank or credit union and is not insured by the FDIC or other government agency. The purchase of an annuity isnot a provision or condition of any bank or credit union activity. Some annuities may go down in value.