Ladder or barbell a CD portfolio?

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Certificate of deposit investors who try to avoid market timing issues when investing will often create a laddered CD portfolio. They invest equal amounts in CDs over a set time horizon, with the deposits acting as the “rungs” of the ladder. When the shortest rung matures, the money is reinvested in the longest maturity on the investment horizon.

One issue in constructing a CD ladder is that the investor typically puts the ladder together at one point in time, so he is committing the entire portfolio at the yields available at that point in time.  The investment benefits of having a laddered-CD portfolio then come with the passage of time as the investor reinvests the maturing CDs in the longer-date maturity in the new-yield environment.

Barbells provide short-term liquidity

A barbell strategy is a little different. With a barbell strategy, the investor puts half the portfolio into CDs with short-dated maturities and the other half into CDs with long-dated maturities. The typical reason to do this is to benefit from rising short-term yields and to maintain a higher degree of short-term liquidity in the portfolio. With the Federal Reserve promising to keep short-term rates low over the foreseeable future, rising short-term rates aren’t the reason to barbell the CD portfolio. The reason is to replace the short end with a high-yield savings account.

High-yield savings accounts provide liquidity, and the highest national yield currently available on these accounts is within 0.05 percent of the annual percentage yield on a one-year CD maturity and is within 0.15 percent of the highest nationally reported yield on a two-year CD. If interest rates do head higher, so will the yields on these high-yield savings accounts.

When to lift the barbell

What I’m suggesting is that, rather than have money caught in the rungs of intermediate maturities in a laddered CD portfolio, the investor buying CDs in today’s market, barbell that portfolio and, if long-term CD rates head higher, they can later convert the barbell portfolio into a laddered CD portfolio, avoiding the timing issue of building the laddered CD portfolio in today’s interest rate environment and then having to wait for CD maturities to benefit from rising long-term yields.

What do you think about investing in a barbell portfolio in today’s interest rate environment?

To reach me on Twitter, visit @DrDonSays.

Don Taylor is Bankrate’s Personal Finance Adviser and an assistant professor of business administration at Penn State Brandywine in Media, Pa. He holds a doctorate in finance and has earned both master’s and bachelor’s degrees in finance. To ask a question of Dr. Don, go to the “Ask the Experts” page and select select one of these topics: “Financing a home,” “Saving & Investing” or “Money.”

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