Laddering Your CD Helps Smooth Out Rate Cycles:

One way to beat rate cycles is to ladder your CDs. Laddering your CD portfolio is a lot like dollar-cost averaging stock purchases. You simply take advantage of the interest rate spread over several different maturities without sacrificing liquidity.

A CD ladder can be as long or as short as you like, but for our example let's use a five-year ladder that has a rung for each year. If you had $ 25,000 to invest, you would invest $5,000 in each rung. (Example: You would put $ 5,000 in a one-year CD, $ 5,000 in a two-year CD, and continue this up to $ 5,000 in a five-year CD).

After the first year has passed, your one-year $ 5,000 CD would mature and every CD in the ladder would move forward one year. Or in other words, your two-year CD would now mature in one year, the three-year in two-years, etc.

Now, with your newly matured monies, you simply reinvest them at the end of the ladder, or in our example five-years.

The underlying purpose of a ladder is to help eliminate a lot of “timing the market” emotions that goes on when most people invest. Ladders really help pay dividends because they smooth out those peaks and valleys of rates.

If you are starting a ladder in an extremely low-rate environment, you might opt to start your ladder with shorter maturities. Likewise, if you already have a ladder and are a year or two into it, you might lengthen your ladder to get a better return. Either way, discipline is the one thing to remember.

Stick to your ladder and your ladder will become your key to success in CD investing.