Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Laddered CDs

Dear Dr. Don,
What is the best way to ladder CDs given current low rates?
Marlene Maturities

Dear Marlene,
Use a stepladder instead of an extension ladder. A laddered CD portfolio has maturities at regular intervals, like rungs on a ladder. That keeps the CD investor from making market bets on interest rates. When a CD matures, the investor reinvests in the longest maturity on the ladder.

If a benefit of constructing a CD ladder is to avoid making interest-rate bets, then it seems counterintuitive for me to suggest that you change how you build your ladder based on the current interest-rate environment.

But investing all your money in CDs at one time has you putting all your money to work in one interest-rate environment. If you're convinced rates are headed higher, then there's a benefit to buying in over time. A stepladdered CD portfolio keeps the maturities shorter than how you would otherwise invest the money, and as these shorter maturities roll off, you can use the maturities to buy rungs on a longer ladder.

The table above shows short-term CD rates. Current rates in your market are available here on Bankrate. One approach to a stepladdered CD portfolio would be to divide your investments between a money market account, a six-month CD, a one-year CD and a two-year CD. The money market account keeps funds available for buying opportunities while you wait for higher rates. This Bankrate feature has more about creating a stepladdered CD portfolio.