Conservative investors who are seeking regular returns and a possible return of principal often include fixed-income investments, such as bonds and certificates of deposit (CDs), in their portfolios. However, a portfolio heavily slanted toward fixed-income investments may be vulnerable to inflation or fluctuating interest rates. One technique used to balance return and risk within this particular asset class is laddering—a way of maintaining a series of fixed-income investments with different maturities.

A laddered portfolio is made up of fixed-income investments that mature at staggered intervals, whereupon they are cashed or reinvested. Each investment becomes a rung on a ladder toward the investor's long-term savings goal. Because investments with shorter maturities generally have lower interest rates, laddering provides the financial benefits of long-term interest rates with the flexibility of shorter-term maturities. Furthermore, stepped maturity dates may have liquidity options that enable an investor to hold a security until its date of maturity, protecting against early withdrawal penalties or downturns in market value.

The following hypothetical scenario assumes no federal taxes or fluctuation in interest rates and does not represent the performance of any particular investment:

Alice Blackwell wants an investment portfolio that will allow her to access her funds when she attends graduate school. She decides to deposit $10,000 into a laddered bond portfolio and reinvest the principal until she needs the funds. Alice splits her principal among five bonds with different maturities and interest rates (see table). One of her bonds will mature every year for the next five years.





Year Due


1 year





2 years





3 years





4 years





5 years




When her one-year bond matures, Alice pockets the interest earned and uses the principal to buy a five-year bond with a higher interest rate that matures in 2011. When her two-year bond matures, she again pockets the interest and purchases a higher-yielding five-year bond that matures in 2012. Alice keeps buying bonds with longer maturities and larger returns, and one of her bonds continues to reach maturity every year, giving her a chance to remove money or reinvest.

Laddering is one way to manage certain risks and add liquidity in fixed-income portfolios. If you are considering using this strategy, consult a financial professional for advice on whether it fits your situation.

Emochila: CPA Websites