Does a CD ladder still make sense?

Supplementing the CD ladder

Some CD products out there can enhance CD rates, or allow an easy out when rates do go up -- for instance, no-penalty, or liquid, CDs. Though they may have a lower yield than comparable CDs, the chance to avoid an early withdrawal penalty may be worth it for some investors.

Bump-up CDs allow you to raise your rate if interest rates rise. However, the cost of flexibility may eat into the yield a bit. It does depend on where you shop, though. Internet banks sometimes have rates on bump-up CDs that are competitive with other high-yield products.

One caveat: "You don't want to put all your money in (bump-up CDs) because they will call it from you if rates go down," says Hopwood.

When a CD is called, the bank redeems the investment plus any interest earned up to that date.

The Federal Reserve's recent enactment of a second round of quantitative easing -- the effect of which will be lower interest rates -- may be something to be wary of.

Because CD rates are already so low, Foss says that the most pressing concern for fixed-income investors is the eventuality of rising interest rates and inflation.

Though it's low now, if inflation increases, it will quickly outstrip the gains earned by low-yielding CDs and eat away at purchasing power.

To combat that, fixed-income investors might consider complementing their CD ladder with a very safe bond fund.

"One might consider putting between 50 (percent) and 75 percent of the portfolio in CDs and ladder them out. Then supplementing with a very good high-yield, short-term corporate and Treasury bond fund," Foss says.

That will help investors "maximize returns and stay above the yield curve and inflation," she says.

As interest rates rise, investors could consider lengthening their ladder as rates dictate. Until that happens, it's a waiting game as fixed-income yields continue to stagnate.

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