WITH the recent volatility in the stock market, I often speak with people who are hesitant to put their entire nest egg into the market. Additionally, with the economy creating tight times for families, it’s often necessary to make sure funds are available if and when we need them. For those investors who are either reluctant to jump head first into the market or those who may have a need for cash, the strategy of laddering Certificates of Deposit (CDs) may be appropriate.
CD laddering is the process of structuring your investment into CDs to take advantage of the higher rates afforded by longer-term time deposits, yet maintaining liquidity by arranging it so that equal portions of the invested money is available periodically. To accomplish this, you begin by buying numerous CDs with various maturities. For instance, let’s say you have $25,000 to invest. Rather than investing the $25,000 in one CD that matures at a designated time, by laddering CDs, you may choose to invest $5,000 in each of five separate CDs. In this example, you would then purchase a 1-year, 2-year, 3-year, 4-year, and 5-year CD in equal amounts of $5,000. After one year, when your first CD matures, you would invest it in a new 5-year CD. Each year, a CD will expire and, if the funds are not needed, they will be reinvested in a new 5-year CD to take advantage of the higher interest rate typically offered by a 5-year CD as compared to the 1- or 2-year CDs.
This approach allows you the comfort of knowing that a CD will mature each year in case you need the money, yet still take advantage of the higher rates typically offered for longer maturities. Staggering your maturity dates also helps smooth out the volatility of the market. If interest rates rise during the year, you will have money available to invest in a higher rate CD. Or, if rates fall, only a portion of your investment dollars will need to be reinvested at the lower rate.
CD laddering may be a strategy that’s appropriate for your lifestyle. Plus, with the guaranteed interest rate offered on CDs, you will be able to plan your future with confidence.
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( Published October 3, 2009 in Asian Journal Los Angeles p. C5 )
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