Reinvestment risk occurs when you have money from a maturing fixed-income investment, such as a certificate of deposit (CD) or a bond, and want to make a new investment of the same type.
The risk is that you will not be able to find the same rate of return on your new investment as you were realizing on the old one. In fact, the return could be significantly lower, based on what's happening in the economy at large, though it could also be higher.
For example, if a bond paying 6% interest matures when the current rate is 4%, you must settle for a lower return if you buy a new bond unless you're willing to buy one of lower quality.
One way to limit reinvestment risk is by using an investment technique known as laddering, which means splitting your investment among a number of bonds or CDs that mature gradually over a series of years.
That way only part of your total investment will mature and have to be reinvested at any one time.
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- Barbell strategy, Bond swap, Buy-and-hold, Buyback, Intermediate-term bond, Laddering, Swap, Tranche
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