This simple and yet efficient approach to solving interest rate volatility can work for you. It involves an annual maintenance on the investor’s part and the ability to use the internet for available interest rates. Never allow anyone to charge you for this approach to bank deposits, do it yourself. There are numerous options available to find and secure the highest rates possible.
It is simple to use Google, Bing or other search engine on the internet to find the best interest rates. Just type in “Best Bank CD Rates” in their search engine and explore the available options.
A website I like and one that has up to date rates is www.bankrate.com which usually is very dependable. There are numerous choices and options.
How can you take advantage of CD yields, while still participating in an interest rate upswing? That’s where the CD Ladder Strategy can come into play.
With a CD Ladder Strategy, you purchase several CDs and you “ladder” your money over different maturities. By purchasing shorter- and longer-term CDs, you spread out any interest rate risk. You don’t earn as much as you would by locking in for the long-term, but you are able to take advantage of the market should interest rates rise in that time period.
As an example, let’s say you have $200,000 to deposit from your IRA. By using the “CD Ladder Strategy”, instead of locking 100% of your money in for 5 years, you would spread that around shorter maturities. Here is how your initial CD purchase would look:
- A $40,000 1-Year CD
- A $40,000 2-Year CD
- A $40,000 3-Year CD
- A $40,000 4-Year CD
- A $40,000 5 Year CD.
The concept is to think of your CDs as the rungs in a ladder…. each one just a little further up the ladder than the next.
As each CD comes up for renewal, you purchase a new 5 Year CD at the best interest rate available and locking in that interest rate for the whole period.
At the end of the first year your first $40,000 CD is up for renewal. If interest rates have gone up, you can roll that money into a brand new 5-year CD, locking in a better rate. If interest rates have slipped, it isn’t the end of the world because what you are accomplishing is the overall interest rate on all five CDs. This approach should minimize volatility and level out yields based on the full five-year time period.
This easy to manage approach will help achieve less volatility and more overall yield in relationship to interest rate risk. Plus, the “ladder” approach is easy to maintain and to manage.
Many banks will help you set up your ladder and manage it for you. Just as our advice in the beginning of the book states…..”Doing it yourself” will allow you more options and a higher net interest return.