CD Investment Strategies

A CD (certificate of deposit) is a type of investment/financial product offered by banks and financial institutions that is classified as a time deposit. CDs, also sometimes referred to as fixed term deposits, offer a high rate of return in exchange for the account holder leaving funds untouched until the account maturation date. If the funds are withdrawn early the account holder may incur significant interest penalties, thereby negating the overall benefits of the investment. In basic terms, financial institutions are more willing to pay high interest rates if they can ensure that the money will be held for a specific period of time, as this makes it easier for banks to invest in long-term endeavors that ultimately yield higher profits. The following are three commonly used CD investment strategies that have been proven to be effective and are recommended by financial advisors and planners worldwide.

CD Investment Strategies – Laddering Deposits
Laddering several smaller short-term investments incrementally over a set time period may be more advantageous than investing a lot of money into a single long-term investment. By doing this, the account holder can continuously have access to long-term CDs with the highest interest rate possible, rather than being trapped in the terms and conditions of a single long fixed term contract. In practice, the laddering strategy requires the investor to open several CDs, each with varying maturation dates. For example, an investor with $100,000 to invest would open a one-year CD with $25,000, a two-year CD $25,000, a three-year CD $25,000, and a four-year CD $25,000. After the one-year CD has matured, the profits of are reinvested into the four-year CD, and this process is repeated year after year, thereby providing stability by giving the investor ongoing options and access to the latest and greatest interest rates and account terms.

CD Investment Strategies – Bullet Technique
The bullet technique is one of the most popular CD investment strategies, and is the exact opposite of the laddering strategy, as it requires multiple CDs to mature simultaneously. This strategy is especially beneficial for investors that are saving for a particular date or event in the future, as it will maximize the lump sum paid out to the investor upon maturation. With the bullet strategy, the investor would start by investing a portion of their money into a long-term CD, gradually investing more of their money into new CDs each year. For example an investor with $100,000 to invest could invest $20,000 and a five-year CD this year, $20,000 in a four-year CD next year, $20,000 in a three-year CD the year after that, and so on. This would cause all of the CDs to mature at the same time, thereby maximizing the return received as a lump sum on the maturation date.

CD Investment Strategies – Barbell Method
The barbell method is similar to the laddering strategy, however rather than investing a large sum of money into multiple CDs that gradually mature, the barbell method eliminates the use of midterm CDs. In practice, you would invest a portion of your money into a long-term CD, and a portion of it into multiple short-term CDs. As each short-term CD matures the funds are reinvested into a new long-term CD. This gives the investor the opportunity to take advantage of new interest rates on long-term CDs, which usually yield the highest profits. The barbell method is seen as a more secure form of laddering, giving the investor more freedom and control in terms of reinvesting returns and avoiding low interest rates on a long-term basis. Thus, the barbell method is usually more ideal for investors that have a large amount of money to invest.

Related Information