f you want an investment matures in August you may be able
that maintains your to earn 5.20%. This could be
principal, Certificates of higher if inflation starts to be
Deposit (CDs) are a great way to a worry and more increases come.
go. As with most investments, we When August comes around, you are
all hope to time the market at celebrating because your
its highest, but without a portfolio will re-price with
crystal ball that proves to be higher CD rates.
difficult. The best advice is to
create a ladder and then maintain Okay, now if they are wrong and
that ladder. the economy takes a down turn.
Rates rise in March, but they
The temptation in a flat or hold in May. By the time August
inverted yield curve environment comes around, the FOMC needs to
is to go short. However, this can lower rates to spur the economy
be disastrous if rates drop once again. As a result your
considerably. For instance, if portfolio re-prices lower.
you invest all of your funds in
6-month CDs because short-term However, there is any easy
rates are projected to rise your solution to this dilemma. Build a
entire portfolio may be in for a laddered portfolio! Generally, CD
surprise if the commentators are investors are paid a premium for
wrong. opening longer-term accounts.
With a normal sloped curve,
Let’s first assume they are longer-term CDs (5-Year to
right. By March, Fed Funds will 10-Year) generally pay 50 Basis
be 4.75% and by May 5.00%. You Points to 150 Basis Points (0.5%
can purchase a 6-Month CD today to 1.5%) more than shorter term
with a rate of 4.95%. If rates CDs (6-Month to 1-Yyear). For a
hold after May, when the CD $100,000 investment, this is $500
to $1500 more a year. For $1MM, probably be able to take
this is $5,000 to $15,000 more. advantage of some higher rates.
And taking this out for five The added bonus is that you know
years, that could be $75,000 more a 5% return over any length of
in your pocket. time is a good return and
investing long protects against
Now is a perfect time to build the ups and downs that are
your ladder. You can be somewhat coming.
confident that in the short-term
rates will rise and you will
About the Author:
Chris Duncan is a NASD Registered Representative. He specializes in helping clients find the highest CD rates nationwide. Clients include individuals, financial institutions, corporations, and public agencies. http://www.jumbocdinvestments.com
