Tuesday, April 5, 2011

Hedge the risk with a CD ladder

Even though CDs are a low-risk investment, you may be looking for something with even more security in a down economy. CD rates are fairly low, but building a CD ladder can hedge the risk of rate cycles by giving you the benefit of investing in both short and long-term maturities. It also gives you the advantage of liquidity, as laddering keeps your CDs consistently maturing and paying out.
How it works
Think of the rungs on a ladder to better picture how a CD ladder works. The first rung of the ladder is the shortest period. If you have $100,000 to invest over a five-year period, you’d invest $20,000 into a one-year CD on the first rung. The second rung would be a two-year CD at another $20,000 and the third a three-year CD at $20,000. This continues up to five-years. As each CD matures the next moves up a year, allowing you to reinvest that money each year or use it for other expenses. Since CD rates are low, CD laddering gives you the opportunity to reinvest each year if yields rise.
Find the best CD rates
If you decide to build a CD ladder, it’s important to find the best rates possible. Look for deals at banks, credit unions, savings institutions and brokerage firms to compare before you begin. Some institutions are posting higher rates to attract deposits.

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