Laddering CDs likely best strategy for liquidity

Your Money


Recently, I've found ads in the newspaper for a three-month certificate of deposit with a 5.41 percent annual percentage yield and a one-year CD yielding 5.56 percent.

Meanwhile, yields of 5 percent or more can be had from several online savings accounts and money-market mutual funds, which are completely liquid. So should you tie up your money in a five-year or longer certificate of deposit to be paid 5.7 percent or 5.8 percent?

Most likely not, many experts said, and I agree that "staying liquid" is the logical strategy now. But with CDs becoming hot investments - banks and brokerage houses are advertising them heavily - I'd like to go beyond one-size-fits-all answers.

"For a CD investor, there is not much incentive to stretch into longer maturities," said Greg McBride, senior financial analyst for, which tracks rates nationwide. A bank's early withdrawal penalty could wipe out any extra interest if you have to cash in too soon. But suppose the yield on a 10-year CD will be enough to meet your needs during that time, and you can leave your principal untouched until maturity. In that case, what's wrong with locking in the yield?

"I can't argue with anybody that looks at their time horizon" and locks in a rate that meets their needs, he said. Another strategy is "laddering," or having CDs maturing at different times. "That's an all-weather strategy, to diversify among a number of maturity dates so the income stream is more predictable," McBride said.

As part of the fixed-income portion of a diversified portfolio, I have CDs maturing each of the next six years. If rates rise, I don't have to wait too long to renew at a higher rate. If rates fall, my longer-term CDs will continue to pay a higher yield.

"Laddering does capture some of the highest return and protects you as well if rates fall," said Tom Coan, president and founder of the Federally Insured Savings Network (, a Bethesda-based firm that specializes in CDs.

To build a CD ladder, look for the best rates for each maturity from financially strong banks. You can search at sites such as or, or you can buy CDs through brokerage houses or firms such as FISN.

One advantage of dealing with a single firm is simplified record-keeping, with all your CDs (and maturity dates) listed on the same statement. You can spread your money among many banks as part of one brokerage account and stay within the limit for Federal Deposit Insurance Corp. protection. That limit is $100,000 for non-retirement accounts and $250,000 for retirement accounts per bank and owner on each registration. (For details on FDIC coverage, see

With some exceptions, including online banks and some promotional offers, I am generally finding better rates from CDs sold through brokerage houses.

"The broker is able to get the better-yielding CDs available rather than being limited to a local bank," said Andy Wrobel, a senior vice president at Fidelity Investments' retail brokerage. Banks normally issue brokerage CDs in large denominations, which tend to pay a higher yield, and the brokerage firms divide the CDs into smaller units for sale to their customers. Investors typically pay no commission to buy a newly issued brokerage CD, as the banks pay the brokerage firms to have the certificates sold.

Unlike CDs sold directly by banks, brokerage CDs impose no early-withdrawal penalties and can be sold in whole or in part before maturity in the "secondary market," that is, to other investors willing to buy them.

But if you sell before maturity, you could lose a bundle. Prices of CDs, like those of bonds, fluctuate before maturity in the opposite direction from interest rates. My most recent brokerage statement lists one of my longer-term CDs as being worth only 97 cents on the dollar because rates have risen since I bought it. If I had to sell it now, after selling costs and assuming I find a willing buyer, I stand to receive less than 97 cents. But if I hold the CD to maturity as I plan, I'll get my full principal back.

Humberto Cruz writes for Tribune Media Services.

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