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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: CD Laddering - Is it worth it? Date: 3/2/2006 12:01 AM
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Sometimes common understandings are helpful. Lots of times they're not. I, for one, am always willing to question conventional assumptions and practices, especially if they offer inferior results and are enforced by arbitrary "authority".

Absolutely! I am a big believer in undermining false or misleading authority (or exposing incorrect conventional wisdom) using facts.

What might be a minimalist ladder? 2 rungs, right? which could be created instantanteously or sequentially, as Loki reminds us.

Consider a ladder of three rungs. Conventional practice would weight each rung equally and space then equally. But why? Can anyone defend the practice other than by making the weak appeal to custom?


Equal weighting by value may or may not be the correct way of creating a ladder. It all depends on what you want that ladder to accomplish. If, for example, you want it to accomplish stable and equal (or close to equal) cash flows, then you would weight by cash flow.

If the spacing of the rungs is equal, that that mean arithemtically so? Why are geometrically spaced rungs overlooked? Etc. etc.

It is always possible to question every aspect of conventionially accepted ideas and to find better ways of doing things. Always. No of this stuff is written in stone and a lot of it isn't very good.


I concur.

I have ladders, some of which look like conventional ladders and some are of my own shaping. Some are even a bit broken for some of their rungs having been called. But they are ladders, everyone of them. Together, they are parts of my portfolio which also has other sub-parts, which are also portfolios in themselves.

What are the two frequently mentioned purposes of constructing fixed-income ladders: (1) management of risk (2) management of cash flows. If a person constructs something that has what Wittenstein would call a "family resemblance" to thing other people also consider ladders, then it, too, is part of the set of ladders.


I think you may have missed (unless you include it in "risk") the primary benefit of a CD ladder which is Liquidity, or at least more liquidity than a simple "all in"/"all same" approach (like dumping everything into a 5 year CD at once). The most common use of a ladder, and why it is called a "ladder" in the first place, is to ensure that some (usually equal or near equal) portion of the funds become available (i.e. liquid) on a recurring basis.

One of the more common uses of a fixed income ladder is by those who use asset allocation. For example, one who prefers to maintain an allocation of 60/40 equity/fixed income, and prefers to rebalance once a year, must have at least some fixed income securities that become liquid on or around the annual reallocation date. This is critical (to avoid unneccesary early termination or other trading fees) in those years in which the terminal allocation is, say, 56/44, and 4% from the fixed income assets must be moved into equity assets to rebalance*.

There is no defensible reason why any investor's ladders have to look exactly like anyone else's.

Of course not! But to preserve the common understanding of the language of discussion, it helps to use the word "ladder" to refer to what is commonly understood as a ladder rather than some other construct that suits your particular situation.

So, to further our understanding, how would you define a ladder in your case and how would you differentiate it from a "portfolio" that provides the desired cash flows.

Each person's situation is unique, as are their needs, means, skills, understanding. There is nothing in investing that can be done only one way. The financial middlemen would like you to believe that, because they can then claim expertise and gouge fees. Therefore, challenging assumptions and definitions is a survival strategy for which The Motley Fool was supposedly created and which it supposedly supports. Or has it merely become yet another safe harbor for conventional wisdoms?

Maybe it has. Some of the recent advertisements appear to be closing in on conventional wisdom rather than challenging it.

* and even this strategy is imperfect when rebalancing becomes extreme, but historically that has been a rare situation.
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