Posted on Tuesday, 21st June 2011 by Nicholas P
CDs are a common investment vehicle for many investors. They provide flexibility as they can be set up for differing lengths of time. In addition, CDs offer the investor a payout at maturity and the possibility of reinvesting the funds. One way in which investors use CDs are as a cash earning vehicle. This is set up though what is called CD laddering. CD laddering is a safe way for investors to reap a return on their investment as all the funds are FDIC insured by the credit union or bank which holds the funds. CD laddering is therefore a straightforward and safe way to produce regular cash flow in a structured earning setup.
Setting up a laddered CD portfolio is a straightforward process. A CD can be obtained through a bank which is FDIC insured as well as through a credit union whose funds are insured by the NCUA. This offers the investor protection for the principal invested should the bank become insolvent. When setting up a laddered CD portfolio, the investor should indentify what type of cash flow goals they are seeking. CDs with the shortest term rates such as three to six months will yield the lowest rate of return while those set up for longer periods will offer a larger return on investment. Keeping this in mind, the investor can set up their CDs with varying maturity dates and spread these out to reap the highest amount of return. The end result will be a portfolio that produces regular cash and interest payments tailored to fit the individual investor’s goals.
CD laddering offers many benefits the main one being regular cash flow; however they do require regular maintenance. This can be alleviated by setting up your CD laddered portfolio to have certain CDs renew automatically. Some investors choose to use a brokerage house to manage their CD portfolio but this option carries its own considerations. For instance a brokerage house does not issue its own certificate of deposit products and so there is often a commission involved as they will charge for obtaining the CD through a lending institution and also charge a fee for the maintenance of the portfolio. The commission your brokerage house charges may also affect the YTM rate or yield to maturity rate. In addition, there may be extra penalties charged if the investor needs to withdraw funds before the CD’s maturity date has been reached.
CD laddering can be an excellent investment option which offers a customizable cash flow structure paid out in regular intervals. They work well for investors who are looking for a simple investment structure that is easy to understand and provides little to no risk involvement. It may be best to work with a professional banker to manage your CD laddered portfolio as brokerage firms carry with them restrictions, penalties and commissions that may complicate your portfolio goals. In order to best decide the laddering portfolio that is right for them, each investor should consult with their personal financial planner for help making the best decision.
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