Technique for Staggering Maturities

Suppose you want to buy an investment, like a CD, and you want to stagger maturities. You could buy five CDs to start your ladder. The first CD would have a one-year term, the second would mature in two years, and so forth. After one year, when the first investment on the ladder matures, you would reinvest the proceeds in a product with a five-year maturity. The ladder remains the same, as the original five-year investment is now four years from maturity. The original four-year investment is now three years from maturity and so forth.

When you stagger the maturities of your fixed-income investments, it allows you to take advantage of changing market conditions, especially higher interest rates; instead of locking up all your money at a lower interest rate, you have access to a portion of it every year. Of course, this also works in reverse; interest rates can fall, leaving you no choice but to reinvest your money in a lower-rate CD when your original CD matures. Building investment ladders increases the liquidity of your portfolio, as one or more investments are consistently maturing in fairly short order. This gives you access to your money and the flexibility to take advantage of an investment opportunity or cover an emergency without having to liquidate your entire portfolio.

When building bond ladders with staggering maturities, Kiplinger recommends high-quality municipal bonds and Treasury securities, because these offer abundant choices in the markets, carry low risk and are available in varying lengths of maturity.

Suppose you have $10,000 to invest in bonds. If you purchase one bond that matures in five years, you will be tied to the original interest rate for the length of the debt security. In addition, when the five-year bond matures, you will be subject to the current interest rate if you want to reinvest the proceeds. However, if you invest $2,000 into bonds that mature in one year, $2,000 into bonds that mature in two years, $2,000 into bonds that mature in three years, $2,000 into bonds that mature in four years, and $2,000 into bonds that mature in five years, you will have access to part of your bond investment funds each year with the opportunity to seek better earnings.

Using the ladder technique for staggering maturities works the same way with certificates of deposit. Most banks and financial institutions offer higher interest rates for CDs with longer maturities. However, remember if you purchase only one CD with a long maturity, you will not be in a position to take advantage of an increase in interest rates without paying penalties for early withdrawal and negating earnings. CDs are offered on the market with a variety of maturities from one month to three months, six months, nine months, one year, and so forth. Choose what works for you and stagger the maturities on your CD ladder to fit your personal financial needs.

An alternative to staggering maturities is to buy several CDs with the same maturity. For example, if you have $10,000 to invest and the bank's minimum investment in a five-year CD is $1,000, rather than buying a single $10,000 CD, you could buy ten $1,000 CDs. Then, if you need to liquidate $2,000, you only have to break two CDs and you can leave the other eight intact. Your penalties will be less than if you broke a $10,000 CD, and the rest of your money remains in the CD.