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In the Media - Make This Simple Move to Get More Return on Your Cash (WSJ)

Make This Simple Move to Get More Return on Your Cash

Our very own Marcus Holzberg, CFP® was recently featured in an article from the Wall Street Journal about CD ladders.

To understand this strategy better, let's break it apart. Certificates of Deposit (CDs) are fixed-income assets (like bonds) issued by banks that investors can purchase. In owning these assets, the investor receives interest payments that are usually higher than traditional deposit accounts (like money markets or savings accounts). The tradeoff for gaining a higher yield for the investment is that the investor commits their money to the bank for a set term.

For example, let's say you purchase $10,000 worth of a one-year CD with an annual percentage yield (APY) of 4.25%. You would give the bank $10,000 (CDs are purchased in denominations of $1,000), and the bank would agree to pay you 4.25% over the course of that year -- totaling $425 in this case. Depending on the terms of the CD, you may receive that interest quarterly, yearly, or once the CD matures.

Two important factors to analyze with CDs are their yield (APY) and the maturity date. Once you reach the maturity date, you will get your money back plus interest. CDs can be purchased through a brokerage account (brokered CDs) or directly from your bank (bank CDs). Brokered CDs allow you to shop the country to find the most competitive rate right from your brokerage account. Meanwhile, bank CDs are more convenient as they may be purchased directly from your bank, but often the rates are less competitive than brokered CDs. Also, if your bank has an investment division, they may ask you to open a separate account in order to purchase their CDs.

CDs are a great way to earmark your money as low-risk, especially if you have a predictable expense coming up. This is because they are also usually federally insured by the FDIC up to the standard deposit insurance amount, which is currently $250,000 "per depositor, per insured bank, for each account ownership category."

NOTE: It's worth double-checking to make sure they are federally insured before investing. Brokered CDs may indicate directly on the investment platform whether they are FDIC insured, or they may provide you with an FDIC certification number. With the latter, you can go onto the FDIC's website and type in that number to ensure your CD is insured. For bank CDs, you can ask your bank, "Are these CDs insured by the FDIC?"

It can also help you set up a predictable income stream in retirement to supplement any of your other sources of income. They have low default risk and are highly liquid. They can be sold or cashed in before maturity, however, you may pay a penalty and agree to forgo receipt of any future interest payments.

A ladder strategy can be established for a portfolio of bonds (including CDs) with staggered maturities. For example, if you were to invest $100,000 into CDs using a ladder strategy, you may invest:

  • $25,000 into a CD maturing in 1 year,

  • $25,000 into a CD maturing in 2 years,

  • $25,000 into a CD maturing in 3 years, and

  • $25,000 into a CD maturing in 4 years.

**For illustrative purposes, we modeled out a ladder strategy with yearly increments, but you can tailor the strategy to any timeline.

Since there is a combination of short and longer-term CDs in this strategy, you get the benefit of higher bond yields from longer-term CDs with the flexibility of cash being available to you systematically (every year in this example) to allow you to either 1) spend the money, 2) invest it elsewhere, or 3) reinvest it into a longer-term CD and continue the ladder strategy (in the above case a four-year CD). Moreover, bonds with shorter maturities are less susceptible to price fluctuations and reduce the overall portfolio interest rate risk.

Example Ladder Strategy of Reinvesting

Your Principal Investment Once it Matures

CD ladder

This strategy is especially effective when the Federal Reserve is raising interest rates. As your short-term CDs mature, you can roll them into longer-term CDs to take advantage of increasing interest rates. In doing so, you raise the overall yield of the CD allocation in your portfolio by systematically purchasing longer-term CDs with higher maturities as interest rates increase.

NOTE: typically, bonds with longer maturities have higher yields, and bonds with shorter maturities have lower yields -- this is referred to as a 'normal yield curve.' But when the opposite is true (bonds with shorter maturities have higher yields), this is referred to as an 'inverted yield curve.' This occurs when the marketplace perceives that interest rates will be lower in the future.

To learn more about this investment strategy, check out the article here in the Wall Street Journal featuring Marcus Holzberg, CFP®.

If you have questions about whether CD ladders may be right for you, talk with a financial advisor. You can schedule a complimentary, no-obligation call with us here!

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About the Author

Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.

** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.


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