The term “nest egg” is well suited when it comes to investment assets and long-term savings. You guard, grow and, eventually, hatch your egg at the right time to meet your financial goals. There are several strategies to consider — such as laddering — that keep your investments productive and intact as they mature.
Laddering is an investment strategy that spreads maturity dates over several years for investments such as bonds and certificates of deposit (CDs). By staggering the dates that your fixed-income investments are due to mature, laddering reduces risk and eases concerns about rising and falling interest rates.
In a typical example, someone with a $50,000 nest egg could, rather than place the sum in one security, invest the money equally over five separate bonds with maturity dates that are a year apart:
| Investment | Amount | Maturity Date |
| Bond 1 | $10,000 | 1 year |
| Bond 2 | $10,000 | 2 years |
| Bond 3 | $10,000 | 3 years |
| Bond 4 | $10,000 | 4 years |
| Bond 5 | $10,000 | 5 years |
The investor then could continue to reinvest the matured bonds into new five-year bonds as the maturity dates arrive, blending the potentially higher yields of long-term investments with the flexibility of shorter ones.
Why should an investor use laddering?
One of the risks of investing in fixed-income securities is changing interest rates. Let’s say you invest $30,000 in a bond that is yielding 6 percent annually and rates fall to 3 percent. If you reinvest at the lower rate, your investment will be earning a lot less; and if interest rates rise again soon after your purchase, you will remain locked into the lower rate unless you can sell your investment, which may result in a loss.
Laddering addresses that risk by spreading your investment across different maturities. This approach enables you to:
Laddering works effectively with both bonds and CDs, making it a flexible strategy for building and maintaining a retirement nest egg.
Market or investment rate volatility, changes in your time horizon and evolving personal goals all affect the amount of risk you feel comfortable taking with your investments. Your ability to tolerate risk influences the investment choices you make and may have a significant impact on your success in achieving your financial objectives. Even if you have a high tolerance for risk, a prolonged period of volatility may cause you to feel more cautious.
Laddering is attractive to those with a lower tolerance for risk because only a portion of the investment is exposed to a changing interest rate at any time and the maturing securities provide consistent liquidity. Even investors with higher tolerance for risk may use laddering to balance income and growth or to stabilize a portion of their portfolio.
Such behavioral tendencies highlight the value of an unbiased and experienced advisor. A professional who is well-practiced in navigating market volatility and implementing strategies to responsibly build a nest egg can provide a significant advantage when pursuing long-term financial goals. Experts with F.N.B. Wealth Management craft tailored solutions for complex needs that manage and preserve wealth.
