When looking for the best CD rates before investing your money, some people try to “time the market,” meaning that they try to determine if the rates are going to increase or decrease before they tie their money up in a CD account. But timing the market is hardly ever a good idea and it rarely results in higher returns on your investment.
One investor recently asked a question about timing the market to get the most for her money. Her and her husband put some money in a money market fund which was only earning one percent interest for them. They had other money for emergencies but they wanted to reinvest their money market money into an account that would give them more.
She was considering putting their money into a 3-year CD account which would earn them 2.7 percent interest. Advisors had told her to split her money up into several CD accounts so all of their money was not tied up in one account in case they need it later. She had the idea of purchasing several CDs at the current rates and then pulling the money out, paying the withdrawal penalty and then putting that money in CD accounts if CD rates go up in the next few months. Her question was this: Would it be a smart financial move to do this?
What she was talking about was CD laddering. When you have you money invested in a CD laddering strategy, it is important to leave the money where it is. The CD laddering strategy is for those who can let their money sit until each CD matures and then reinvest that money into longer term CD accounts upon maturity. So basically, the quick answer to her question is this: Put together a CD laddering strategy in which she could invest some of the money into a 6-month CD, a 1-year CD and so on. Then, as CD rates increase over time (if they do), she can reinvest the money from the maturing CDs into the CD accounts with higher rates.
CD laddering helps keep investors from being locked into a low rate for too long. As a result, if CD rates increase, the investor has the opportunity to reinvest the money at the higher rates as long as those rates stay that high as their CDs mature. It’s a great strategy for those who have the money to invest in several CDs at the same time.
Comments
Shorebreak
July 29, 2010
In the current interest rate environment perhaps the best advice would be a "barbell" strategy. Putting half one's funds in a one-year CD and the other half in a five-year CD. That way if rates go up in a year one would be able to invest at least half the funds in a higher rate CD. On the other hand, if rates remain at their present level for years on end, as in Japan, one would have received a some what higher rate of return, versus a one-year CD, for a five year period. As of now it doesn't appear rates will increase significantly until maybe 2014.
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