Ladder Strategy 

The ladder strategy is a popular investment approach that offers a structured way to manage risk, optimise returns, and maintain liquidity. This article will explain the ladder strategy’s concept, types, benefits, and practical applications in simple terms for beginner investors.  

What is a Ladder Strategy? 

The ladder strategy is an investment technique that involves dividing your capital into multiple investments with staggered maturity dates. Think of it as building a ladder where each rung represents an investment maturing at a specific time. As each investment matures, the proceeds are reinvested into new investments at the top of the ladder. This approach helps balance risk, liquidity, and returns over time. 

For example, in a bond ladder, an investor might purchase bonds with maturities of 1 year, 2 years, 3 years, and so on. As the shortest-term bond matures, the funds are reinvested into a new long-term bond. This ensures continuous income while reducing exposure to interest rate fluctuations. 

Understanding Ladder Strategy 

At its core, the ladder strategy is designed to address three critical investment goals: 

• Liquidity: Investors can access funds at regular intervals by staggering maturities. 

• Risk Management: Spreading investments across different maturities reduces exposure to interest rate changes. 

• Income Stability: The strategy provides a steady income stream as investments mature periodically. 

This method is commonly used in fixed-income securities like bonds or certificates of deposit (CDs). However, it can also be applied to dividend-paying stocks or other financial instruments with predictable cash flows. 

Types of Ladder Strategy 

There are several variations of the ladder strategy tailored to different investment instruments: 

a) Bond Ladder

A bond ladder involves purchasing bonds with staggered maturities. For instance, an investor might buy U.S. Treasury bonds maturing in one year, two years, and three years. The proceeds are reinvested into a new long-term bond as each bond matures. 

b) CD Ladder

A CD (certificate of deposit) ladder works similarly but uses CDs instead of bonds. CDs are fixed-term savings accounts that pay a guaranteed interest rate. Investors can create a CD ladder by purchasing CDs with varying maturities (e.g., 6 months, 1 year, 2 years). 

c) Stock Dividend Ladder

In this variation, investors select dividend-paying stocks with staggered payout dates. For example, they might invest in stocks that pay dividends quarterly but in different months (e.g., January, April, July). 

d) Multi-Asset Ladder

This approach combines different asset classes, such as bonds and CDs, or mixes short-term and long-term securities to diversify further while maintaining liquidity and income stability. 

Benefits of Ladder Strategy 

The ladder strategy offers several advantages: 

• Reduced Interest Rate Risk: By spreading investments across multiple maturities, investors avoid locking all their funds into low-interest-rate periods. If rates rise, maturing investments can be reinvested at higher rates. 

• Liquidity: Regularly maturing investments ensure that funds are available periodically without needing to sell assets prematurely. 

• Higher Average Yields: Combining short-term and long-term securities allows investors to benefit from higher yields on longer maturities without sacrificing liquidity. 

• Diversification: A laddered portfolio reduces risk by spreading investments across different maturities and asset types. 

• Predictable Income: The strategy provides a steady income stream as investments mature regularly. 

Example of Ladder Strategy 

The below examples demonstrate how investors can structure their portfolios to manage interest rate risk, ensure liquidity, and achieve consistent returns. 

United States: Utilising Defined-Maturity Bond ETFs 

In the U.S., investors have increasingly turned to defined-maturity bond ETFs to construct bond ladders. These ETFs hold bonds that all mature in a specific year, providing a convenient way to implement a laddering strategy without purchasing individual bonds. 

Example: 

An investor aims to create a five-year bond ladder using defined-maturity bond ETFs. They allocate US$20,000 annually into ETFs maturing in consecutive years: 

• 2026 Maturity ETF: US$20,000 

• 2027 Maturity ETF: US$20,000 

• 2028 Maturity ETF: US$20,000 

• 2029 Maturity ETF: US$20,000 

• 2030 Maturity ETF: US$20,000 

As each ETF matures, the principal is reinvested into a new ETF with a five-year maturity, maintaining the ladder’s structure. This approach offers diversification and reduces the complexity of managing individual bonds.  

Singapore: Building Bond Ladders with Fractional Bonds 

In Singapore, several platforms facilitate the creation of bond ladders by offering fractional bond investments. This innovation allows investors to diversify their portfolios without the substantial capital typically required for purchasing whole bonds. 

Example: 

An investor with SGX 100,000 wishes to establish a ten-year bond ladder. Using the platform, you can invest SGX 10,000 into fractional bonds maturing each year over the next decade: 

• 2026 Maturity: SGX 10,000 

• 2027 Maturity: SGX 10,000 

• 2028 Maturity: SGX 10,000 

• 2029 Maturity: SGX 10,000 

• 2030 Maturity: SGX 10,000 

• 2031 Maturity: SGX 10,000 

• 2032 Maturity: SGX 10,000 

• 2033 Maturity: SGX 10,000 

• 2034 Maturity: SGX 10,000 

• 2035 Maturity: SGX 10,000 

Each year, as a bond matures, the proceeds are reinvested into a new ten-year bond, preserving the ladder’s continuity. This method enhances liquidity and allows for adjustments based on prevailing interest rates.  

Frequently Asked Questions