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Keep CD Investments Short-Term Author's Picture

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Jay Isaacs

Keep CD Investments Short-Term

We are asked many times a day, “What do you recommend for investing cash in CD’s”? This is a quandary for many citizens and our customers who are on fixed income or dependent upon the income from cash investments.

With our President’s position with taking no action on tax policy and the resultant defensive action taken by the Federal Reserve (“Fed”) to keep rates low to stimulate the economy; we have many Americans scratching their head on how best to invest cash funds. The report from the Chairman of the Federal Reserve last week helped to shed a little bit of light on the future of interest rates. If all scenarios played out as hoped for, the Fed would continue its tapering of buying back securities in the open market and to consider raising rates in 2015.

So what should your reaction be to this news?

 

Image of coin stack growing money plantThere are many ways to invest cash. Dump it all in and hope for best, dollar cost average into interest bearing CD’s, barbell, ladders or stay on the sideline in cash to name just a few. With interest rates low, you would not want to dump everything into an investment and then have rates rise. The lost income opportunity could be significant as rates rise and you must hold your CD investment. Our suggestion would be to keep your CD investments short, meaning no longer than 12 to 18 months. Additionally, we would recommend that you “ladder” you investment maturities over this same time frame. What this means is divide your investments into four or five buckets. Invest one bucket at 90 days, second bucket at six months, third bucket at 1 year and fourth bucket for 18 months. As the first bucket matures, you have the option to cash in the CD or to reinvest. If you choose to reinvest then place these funds 90 days beyond the latest maturing CD. The method of “laddering” allows you to have funds coming due periodically for unexpected needs and allows you to reinvest at higher rates as they rise over time. Interest rates typically ebb and flow over time. Since we have had low rates for a sustained period of time, you must have a strategy for investing your cash.