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Laddered portfolios.

Does this story sound familiar?

An investor visited a local bank because his one-year certificate of deposit (CD) had reached maturity. He stepped up to the teller and announced he would like to roll his investment over into a new, one-year CD at the same rate. The teller, amused, told the investor he was out of luck and pointed to a display listing the bank's current CD rates--two percentage points lower was the best the bank could offer.

This can be frustrating, especially for those of us with disabilities who need our money working hard for us to generate additional income.

Investors are often disappointed to find the current interest rates are much lower than those of their previous fixed income investments. This leaves the question, what should you do? Should you invest for a longer maturity, a higher risk investment for higher returns, a different asset class, or a combination of all of the above?

Fortunately a proven investment technique is readily available to help make the most of an evolving interest-rate environment. Adopting a "laddered" portfolio approach allows investors to minimize the interest-rate risk associated with large, short-term, fixed income investments.

In a nutshell, this strategy adopts a longer-range outlook and diversifies the maturity structure of fixed income instruments within a portfolio. This enables the total return of fixed income investments to be less adversely affected by interest-rate fluctuations. First and foremost, however, do not commit your money over time if you will face additional expenses in the future such as equipment, medical expenses, or a large purchase. CDs and other fixed income investments usually have early redemption fees and market fluctuation risks if not held to maturity.

Structuring a laddered portfolio with investments in successive maturities also allows investors to achieve more flexible management of fixed income-oriented assets. The laddered strategy can help accomplish the following goals:

* Achieve a higher total rate of return by extending the maturities of fixed income investments

* Maintain liquidity within the portfolio through short-term holdings

* Minimize interest-rate reinvestment risk in lower-interest-rate environments, since the higher rates are "locked in" to the longer maturities

* Provide the flexibility to reassign short-term holdings to long-term investments during periods of higher interest rates, in order to lock in those higher rates

Tips for Success

Following are three ways laddered fixed income portfolios can help investors succeed in different interest-rate environments:

(1) Interest rates remain constant. The yield of the portfolio will increase each year because investment in longer maturities will "average up" the total return.

(2) Interest rates drop, The portfolio is protected against reinvestment risk, because longer-term maturities continue to earn higher rates.

(3) Interest rates rise. As shorter maturities come due, proceeds are reinvested at new, higher levels, thereby improving portfolio return.

The large variety of fixed income investments currently available enables investors to choose and adjust the timing of investments within a portfolio to match current and future income needs. The different classes of fixed income investments offer varying interest rates and risks. It is highly recommended--and often mandatory--that you consult and use a financial advisor to invest in certain types of fixed income investments. Of course, laddering is just one of many investment approaches.

No Cookie Cutters

A financial planner or investment professional can help analyze each particular financial situation and adopt a strategy that is best for each investor's needs. There is no efficient "cookie cutter" approach. Many investment strategies can be used to achieve your goals.

Investors may also need a certain amount of growth in their portfolios in order to keep up with inflation. I strongly recommend taking the time to get a free consultation with a financial advisor to educate yourself on the many strategies available. This will help you understand which approach would provide you with the correct amount of income and growth that suits your investment style and risk profile.

As always, I am here to help, and I wish all of you the best of luck.

Contact: Dan.Jones@Raymond James.com.
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Title Annotation:Money talks
Author:Jones, Dan
Publication:PN - Paraplegia News
Geographic Code:1USA
Date:Nov 1, 2004
Words:667
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