After a long week at work, a rather heated topic was discussed in the “House of Seely”. Nothing more stimulating on a Friday night after a couple of glasses of wine than talking about laddered term deposit strategies (sarcasm inserted).

As the chief investment officer for the House of Seely, I have autonomy to make decisions regarding our investments, and almost all decisions are based upon our age, risk tolerance, overall market conditions, and our retirement goals. Whereas the chief financial officer (CFO — aka my husband) has the autonomy to make decisions and manage the rest of the family finances.

However, where the “heat” started to rise about laddered term deposit strategies was when I informed the CFO that I had let a couple of term deposits roll over for another three months.

Now, I won't get into the nitty-gritty of the conversation, but let's just put it this way: our opinions on this strategy were vastly different.

With that said, given our opinions on this topic were so vastly different, it has made me wonder whether this strategy still holds any long-term productive value, especially as we are entering into another falling interest rate environment.

Now, before we get into the nuts and bolts of the article, let me clarify what the laddered term deposit (or CDs — certificates of deposit — depending on where you are from) strategy entails.

The best way to describe the strategy is to imagine a ladder — each rung of the ladder represents a fixed deposit with a different maturity date.

When you set up a ladder, it involves dividing a sum of money into several smaller deposits placed across different maturity dates. As each deposit matures, the investor has the option to reinvest, withdraw, or roll over the funds, creating a staggered series of investments over time.

This approach aims to mitigate some of the drawbacks associated with locking in a fixed interest rate for an extended period, while still benefiting from the generally secure nature of term deposits.

One of the primary benefits of a laddered term deposit strategy is the enhanced liquidity it offers. Unlike a single, long-term deposit where funds are locked away until maturity, laddering ensures that a portion of the investment becomes available periodically. This staggered maturity schedule provides investors with regular access to funds, allowing them to respond to changing financial needs or take advantage of new investment opportunities without incurring penalties or losing out on interest.

For example, if an investor has a ladder with deposits maturing every six months, they can plan to use the maturing funds for upcoming expenses or to reinvest based on prevailing interest rates.

Another significant advantage is the potential for better interest rate management. In a rising interest rate environment, laddering allows investors to reinvest maturing deposits at higher rates, thereby capturing increased yields over time.

On the other hand, in a declining rate environment, the staggered maturities help protect some of the investment's value by locking in higher rates on earlier tranches.

This flexibility provides a form of risk mitigation against interest rate fluctuations, which is particularly advantageous given the generally fixed nature of traditional term deposits.

From my perspective, a laddered term deposit strategy also promotes discipline and long-term planning. By systematically staggering investments, it encourages investors to set clear financial goals and maintain a disciplined approach to saving. This method reduces the temptation to withdraw large sums prematurely, which can sometimes happen with lump-sum investments.

As the deposits mature at different intervals, investors can reassess their financial situation and adjust their strategy accordingly, adding a level of adaptability that is often absent in a single, fixed-term deposit.

However, I also recognise there are some significant drawbacks to a laddered term deposit approach. One of the main disadvantages is the complexity involved in managing multiple deposits.

Coordinating several maturities requires careful planning and ongoing oversight to ensure that the reinvestment process aligns with market conditions and personal financial goals.

For some investors, especially those unfamiliar with investment management, this can be time-consuming and challenging. Mistakes such as forgetting to reinvest or allowing automatic rollovers (which I did) without researching can lead to mismanagement of the strategy.

Another downside is that the overall returns from a laddered approach may be lower compared to other investment options, especially in a prolonged low-interest-rate environment. Since term deposits typically offer fixed interest rates, and the ladder involves locking in these rates for different periods, the strategy might not capitalise on the highest possible yields available in the market.

If interest rates rise significantly, the early maturing deposits do not benefit from the new higher rates unless the investor chooses to reinvest at those rates, which may not always be feasible or advantageous depending on the timing and prevailing market conditions.

Furthermore, the strategy can sometimes lead to a fragmented investment portfolio that lacks diversification. While laddering is effective within the realm of fixed-income investments, it doesn't inherently provide exposure to other asset classes such as equities, property, or bonds with different risk profiles.

Investors relying solely on a laddered term deposit approach might miss out on the growth potential and diversification benefits that a more balanced portfolio could offer.

There is also the consideration of inflation risk (which CFO pointed out). Fixed-rate term deposits do not adjust for inflation, meaning that over time, the real purchasing power of the returns diminishes if inflation outpaces the interest earned.

In a low or stable inflation environment, this might be less of a concern, but in periods of rising prices, the real value of the invested funds could erode, reducing the strategy's attractiveness as a long-term wealth-building tool.

As with all investment strategies, there are benefits and disadvantages. A laddered term deposit strategy can be a valuable tool for investors seeking a balance between safety, liquidity, and moderate returns.

However, it requires diligent management, and it is crucial for investors to assess their individual financial goals, risk tolerance, and market conditions before adopting a laddered strategy.

• Carla Seely has 25 years of experience in the international financial services, wealth management, and insurance industries. During her career, she has obtained several investment licences through the Canadian Securities Institute. She holds the ACSI certification through the Chartered Institute for Securities and Investments (UK), the QAFP designation through FP Canada, and the AINS designation through The Institutes. She also holds a master's degree in business and management