Questions Answered

     I mentioned in a previous post that some investors would be better-off putting their money in a portfolio of laddered CDs. The question has been asked several times "what's a laddered CD?" This is a very simple and timely concept, one that I personally am employing. You simply buy CDs in staggered maturities so that every year or so you have one that matures. This works well in an increasing interest rate environment like what we are experiencing now. The premise is that every time a CD matures your renew it at a higher rate, especially if you lengthen the maturity. Lets say I've saved up $50,000 and I want it in a safe and federally insured investment. I go to my favorite bank or credit union and tell my banker that I want to build a ladder of CDs. Then I ask about any specials they may be offering at that time. I always take advantage of specials if they meet my investment objectives. My ladder might look like this: $15,000 in a 1 year CD,  $20,000 in the 18 month CD which is their special bonus rate, and $15,000 in the 3 year CD. The staggered maturities does several things for me: it gives me a higher yield than just buying one short term CD, it gives me flexibility if I might need the money for something, and it allows me to renew at higher rates in the future. A new product being offered by banks is the "bump up CD". This CD allows you to increase the rate you are receiving on your CD one time during the life of the instrument. The trick here is to take advantage of this feature somewhere around the middle of the term. If you wait too long there won't be much time to enjoy the higher rate. It's important to not forget about your right to raise your interest rate, so mark your calendar to call the bank. Financial Institutions offer CD specials from time to time to increase their assets and capitol. Funds with a stated maturity are preferred because they won't fly out the door during any crisis. Specials don't last long because savers are hungry for yield and flock to them. When the bank meets it's capital requirement, the special is over. Knowing your money is safe and sound and insulated from any stock market shocks makes for a good nights sleep. Good night.