Ladder Your CD Portfolio

Laddering is a smart investment strategy that insulates you from rate fluctuations and generally produces greater earnings. It’s simple to set up and easy to understand.

Instead of putting all your money in one certificate, divide it equally among five certificates, each with a successively longer term. For example, if you have $50,000, put $10,000 in a 12-month certificate, $10,000 in a 24-month certificate and so on.

Roll over each certificate into a five-year term when it matures. If rates have risen when the first certificate matures, 20% of your portfolio is reinvested at higher yields. If rates have dropped, 80% of your certificate portfolio is still earning the higher yields you started with.

The Laddering Advantage

Compare two investors who each started with $50,000. Investor A put it all in one 12-month certificate. The chart below shows the APY at the time each certificate matures and is rolled over into another 12-month certificate.

The certificate is opened at 5.85% APY.

End of Year
APY at Reinvestment
1
6.10%
2
5.60%
3
5.05%
4
6.50%
5
4.0%

Investor B laddered his investments. This chart shows the APY at the time each certificate was opened, as well as the APY when each matures and is rolled over for a five-year term.

Initial Investment
APY
APY at Reinvestment
1-year CD
5.85%
7.10%
2-year CD
6.40%
6.20%
3-year CD
6.70%
5.95%
4-year CD
6.90%
7.20%
5-year CD
7.10%
5.45%

This chart shows how much each investor earned after each year, including the current one.

Income Generated
After: Year 1 Year 2 Year 3 Year 4 Year 5 Current Year Total Income
Investor A $2,925 $3,050 $2,800 $2,525 $3,250 $2,000 $16,550
Investor B $3,295 $3,420 $3,400 $3,190 $3,325 $3,355 $19,985

Investor B earned an additional $3,435 over a six-year period by laddering her investments.

Annual Percentage Yields and figures for illustration only. Your results may vary. Source: Bankrate.com.