What is the definition of Laddering?

Laddering refers to the method where investors have a mixture of different types of bonds and different maturity dates.

Laddering is based on the notion of not putting all your eggs in one basket. It prevents the risk of reinvesting a large portion of the assets in a financial environment that may not provide good returns on the investment (for instance, if an investor has two CDs - one maturing at 2015 and the other at 2018). Even if the rates of returns for 2015 drops to a low when the CD that matures at 2015 needs to be renewed, the funds locked with the 2018 CD does not need to be reinvested at that rate of interest.

Another advantage of laddering is that it can free up capital at the times the investor will need it. Someone can purchase a mixture of short-term and long-term bonds. The short-term bonds may be for payments needed soon (like the tuition of that person's child) while the long-term bonds may provide the funds that the investor will need for his retirement.

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