When Volatility Rises, Ladders Add Stability

Laddering is most used with bonds and CDs, typically through brokerage accounts for bonds and banks for CDs.

However, this strategy can also be effective with structured notes and with fixed and fixed-index annuities.

A laddered strategy provides a blend of predictability and risk mitigation that's difficult to replicate with a single asset.

The Why

One of the most significant reasons laddering strategies are valuable is that they help manage volatility risk.

When rates are rising, long-duration bonds suffer price declines.

When rates are falling, reinvestment risk becomes a concern for the investor.

A laddered strategy can offset both concerns.

While the laddered strategy is often associated with bonds, it can also involve use of other asset classes.

A laddering strategy inside an annuity cycle can create consistent income for the client. The strategy can also provide participation rates or cap rates that fit the current interest rate environment. That kind of built-in change may help a client offset renewal risk, encouraging the client to maintain long-term credit strategies that may be more beneficial than shorter-term crediting strategies.

As each asset matures, the client is never fully exposed to a single-rate environment.

Part of the portfolio adjusts to current rates, while the longer assets continue to provide stable yields, caps, and/or participation rates.

This strategy creates a balancing mechanism, especially during periods of economic uncertainty and market volatility.

Laddering can also help on the human behavioral side.

It reduces the natural human tendency to time the market, especially when volatility rouses loss aversion bias and nudges clients to sell their assets and sit on cash.

In volatile markets, many individuals gravitate toward the perceived safety of fixed rates or cash. This bias is natural, but often individuals miss out on market recoveries or have their cash lose purchasing power because the short-term interest rate is lower than the inflation rate.

A laddered strategy puts a simple, rules-based system in place.

As positions mature, they're reinvested on a set schedule.

The system manages the human loss aversion bias by keeping clients consistently invested and aligned with prevailing rates, without having to guess what comes next.

The Advantages

Diversification

Laddering strategies spread maturities across multiple time frames.

This reduces sensitivity to a major rate move in the bond markets.

If rates rise suddenly, shorter-term maturities will soon reinvest at higher yields.

If rates fall, longer maturities lock in better rates from the prior lower interest rate environment.

Consistency

Clients know exactly when each asset matures, creating predictability.

In times of uncertainty, individuals often seek certainty.

If the laddering strategy uses bonds or CDs, it provides consistency in growth.

If the strategy uses securities, it provides for consistent client crediting each year.

For financial professionals working with retirees, business owners, clients needing scheduled distributions, or clients seeking consistency in crediting their annuity accounts, the laddered strategy provides certainty during periods of uncertainty.

Risk Mitigation Through Time Diversification

A laddered strategy can lessen duration risk.

Instead of holding one long bond or asset that could experience large price swings, the investor holds multiple bonds or assets with varying durations.

Discipline

Laddered strategies enforce a rules-based system. The systematic structure is particularly helpful for clients who tend to hold too much cash in volatile markets.

It can also provide a rules-based system that the client can set and forget.

The system can provide relief so clients don't feel like they have to time the market.

Economic Volatility

During periods of market volatility — which can include recessions, inflation shocks, geopolitical disruptions, or unanticipated political events — the laddered strategy has historically shown greater resilience than portfolios concentrated in a single asset.

The systematic structure helps avoid the potential of loss aversion, which may cause individuals to make portfolio changes in reaction to short-term market events.

In addition, individuals' action bias may prompt them to feel they must act to protect themselves against wild market swings.

Multi-maturity exposure reduces the portfolio's sensitivity to sudden changes in rate and market expectations.

While longer bonds may decline, shorter maturities cushion the effect because they're closer to par value.

During volatile environments, rates often move sharply.

With a ladder-rule-based strategy, the client never reinvests the entire portfolio at the "wrong time."

Instead, reinvestments occur systematically across multiple rate environments.

Volatile markets may cause emotional decision-making, which is part of the human desire to "do something."

The "do something" desire is part of our natural action bias.

Laddering strategies reduce emotion-based reactions by providing a rules-based system that clients understand and trust.

The systematic structure helps manage the natural human biases that often nudge individuals to make bad financial decisions.

The Disadvantages

Rate Environments

When rates drop sharply and stay low, the assets that mature sooner will reset at lower yields.

That cushions the portfolio during the decline, but it can lag the investment returns of locking in longer terms ahead of the drop.

However, this requires market timing, which can be very difficult, even for the most seasoned investor.

Even so, many people gravitate to shorter commitments because near-term clarity feels safer than long-term uncertainty.

The diversification among different maturing assets is another reason a ladder strategy can balance comfort with diversified participation across changing rate environments.

Complexity

A manually laddered strategy may involve multiple CUSIPs, issuers, and maturity dates.

Financial professionals must monitor reinvestments, credit characteristics, and yield curves. This can be more complex than managing a single bond, CD, or mutual fund.

However, annuity strategies can lessen complexity by offering a single index cycle over multiple time frames.

Offering a single asset across multiple maturity time frames can simplify the laddering strategy and make it easier to communicate the value of the rules-based system.

The Value

For financial professionals, a rules-based laddering strategy can offer a compelling blend of predictability, risk management, and behavioral bias support.

Laddered strategies can help clients navigate volatile rate cycles, provide disciplined reinvestment, and create stability.

While laddered strategies may not be the best fit for every client or market condition, they're an option to consider for clients seeking structure and a way to manage risk and investment decisions.

Tyler De Haan is director of advanced sales at Sammons Institutional Group, which provides retirement solutions to financial professionals.