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What is a Share Certificate ladder?

Share Certificates have been a longtime, popular investment tool for individuals as they are seeking a safe and stable place for their funds. They offer a fixed interest rate over a specified period, providing a reliable source of income. However, traditional share certificates often lack flexibility, as investors must commit their funds for the entire term of the share certificate. This is where share certificate ladders come in.

Share certificate ladders operate on a simple principle: Instead of investing in a single share certificate with a fixed term, investors distribute their funds across multiple share certificates with different, staggered, maturity dates. For example, instead of investing $10,000 in a single 5-year share certificate an investor can allocate $2,000 to five different share certificates, each with a maturity date of one year apart. This strategy creates a "ladder" of share certificates, with one share certificate maturing each year.

What are the Advantages of Share Certificate Ladders?

There are several significant advantages of share certificate ladders:

• Increased flexibility. The primary advantage of share certificate ladders is their flexibility. By staggering the maturity dates, investors have access to a portion of their funds each year instead of tying up their savings for one long duration. This feature is especially beneficial in an environment of rising interest rates, as it allows investors to reinvest a portion of their funds at higher rates. Conversely, in a falling-rate environment, it offers protection by ensuring that a portion of the funds stay locked in at higher rates instead of seeing it all renew at lower rates, which means less earning potential.
• Liquidity. Share certificate ladders provide a level of liquidity that traditional share certificates lack. Investors can access a portion of their invested funds without incurring penalties in the event of an emergency or an unexpected financial need. This liquidity offers peace of mind and a safety net that can be especially attractive to conservative investors.
• Yield curve advantage. Another benefit of share certificate ladders is the ability to take advantage of the yield curve. The yield curve is the relationship between the interest rates and the maturity dates of fixed-income securities. Typically, longer-term share certificates offer higher interest rates than shorter-term share certificates to compensate for the additional risk. By creating a ladder of share certificates with varying maturity dates, investors can enjoy the potential benefits of both short and long-term interest rates.
• Lower reinvestment risk. Share certificate ladders allow investors to manage the reinvestment risk. Reinvestment risk refers to the concern that, when a fixed-income investment matures, the available rates may be lower than the original investment's rate. With a share certificate ladder, investors can mitigate this risk by reinvesting a portion of their funds each year. If rates decline, only a fraction of the portfolio is affected, thus minimizing the overall impact.

What are the Disadvantages of Share Certificate Ladders?

Despite their many advantages, share certificate ladders are not a suitable choice for all investors.

First, each share certificate within the ladder has a fixed term. This means early withdrawal penalties may still apply if funds are accessed before a share certificate’s maturity date. Additionally, the rates offered on share certificate ladders may not be as high as those on riskier investments, like stocks or bonds.

Consequently, individuals with a higher risk tolerance, as well as those seeking significant growth, may prefer other investment options. Share certificate ladders provide a compelling blend of flexibility, security, and liquidity. Use this guide to make an informed decision about investing in a share certificate ladder and give your money its best chance at growth.

RGCU Share Certificates

If you're looking for more information on share certificate ladders, stop by one of our branches and ask about RGCU Certificates. We can discuss multiple options that could work for you, and help you set aside some money that starts yeilding dividends for your future.