Among the many investment options available to investors are certificates of deposit, commonly referred to as CDs.
A CD is often grouped among secure investment vehicles such as bonds, savings accounts, fixed deposits, etc.
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While investing in CDs are relatively low risk, it’s best to seek advice, especially when unsure of the next steps.
How to Invest in CDs
Investing in CDs is a straightforward process that requires certain due diligence and a specific amount to be invested.
Once you’ve come up with the necessary strategy and the specific CDs, the next step is to apply.
All you have to do is apply online and provide the necessary documentation. With some institutions, you might be required to visit the bank at least once.
Strategies for Investing in CDs
The presence of early withdrawal penalties can pose challenges in the short and long term on CD investment.
Unforeseen financial needs and changes may necessitate adjustments to your strategy for investing in CDs. Luckily, there are strategies available to navigate these challenges.
CD Ladders
One viable option is the implementation of a CD ladder.
This involves evenly distributing funds across multiple CDs, each with distinct maturity dates.
For instance, a $100,000 investment could be allocated over a 10-year period at $10,000 per year.
Each maturity date corresponds to a rung on the ladder, providing a structured approach with predetermined CD maturity dates and specific amounts available on each date.
The funds can be utilized to address immediate spending needs or, if not required, reinvested into a new 10-year CD to extend the ladder.
This approach also offers adaptability to changes in interest rates.
Thus, extending the ladder allows access to higher rates in a rising market while maturing assets can be shifted to better-paying investments during a declining market.
The Barbell Strategy
For situations where cash is required both in the short term (e.g., within a year or two) and at a predetermined longer-term period, the barbell strategy is suitable.
This involves allocating a specific amount to a shorter-term certificate of deposit and another amount to a longer-term CD, essentially creating a ladder with only the initial and final rungs.
The Bullet Strategy
In contrast to the previous strategies, the bullet strategy entails investing a fixed sum of money into CDs with varying maturity periods, but all CDs mature simultaneously in a designated year.
For instance, if a substantial expense is anticipated 10 years from now, funds can be used annually to purchase a new CD:
- CD 1 matures in 10 years
- CD 2, purchased a year later, matures in 9 years
- CD 3 in 8 years, and so forth.
When all CDs mature simultaneously in year 10, the funds become available for the intended purpose.
Are CDs a good investment?
Those looking to reduce volatility in their portfolios or are more conservative investors may find CDs to be a good fit.
In times of favorable interest rates, they are ideal for those seeking a secure investment option with assured returns.
CDs’ suitability as an investment opportunity is conditional on one’s own financial goals, level of comfort with risk, and current market circumstances.
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Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.