In a troubled economic climate, many experts say that your best bet for a safe investment is a certificate of deposit, or CD. Unlike investments on the stock market, such as publicly traded company stocks or bonds, a certificate of deposit is insured by the FDIC and virtually guaranteed to generate a steady rate of interest over time.
As a general rule, you can count on long term CDs to have the best certificate of deposit rates, in comparison to short term CDs. However, the main drawback to committing a large sum of money to a long term CD is that, if interest rates rise in the midst of your term, your investment is tied up for the entire term of the CD at a lower rate of interest. Also, if you need to liquidate your CD for cash in hand, you will have to pay heavy prepayment penalties to access your cash. To get around these disadvantages, many investors employ a process called CD laddering which allows them to stagger their investments over a period of months, and even across institutions, to ensure that at any given time one of their CDs is turning over and allowing them to take advantage of current market conditions, if they choose to do so.
What is the best CD laddering strategy? It depends on how much you have to invest, but in general, your goal with CD laddering is to provide yourself as much flexibility as possible across your various CD investments. One way to diversify your CD portfolio is to open accounts with different maturity dates at the same time. For instance, if you had $4,000 to invest, you would invest $1,000 each in a six month, one year, three year and five year CD.
Another strategy that helps to diversify your CD portfolio is to open accounts at different institutions. That way, if for some reason your bank chooses to delay withdrawals on investments such as CDs in the event of a bank failure your entire CD portfolio wont be frozen at one time. Opening CDs at different institutions provides you with extra flexibility to take advantage of the best certificate of deposit rates as well.