How to get more than safety with Certificates of Deposit

(c) Copyright 2006 by Dennis Gregory

What you may already know: Certificates of Deposit come in all shapes and sizes.

You can buy CDs for as little as $1,000, all the way up to $100,000, in multiples of $1,000, and still be insured by the FDIC. This makes them one of the safest investments you could possibly find. They also have different expiration periods, such as 1 month, 6 months, 1 year, all the way up to 5 years. Naturally, the more time your money is invested, the better the certificates of deposit rate you can expect.

Traditionally, the difference in Certificates of Deposit rates between a 6-month CD and a 5 year CD was around 1.0 whole percent, but nowadays the margin is much closer, with interest rates on the rise as they are in 2006. At the time of this writing, the highest CD rate for both a 6-month and a 5-year CD is almost the same, around 5.50% APR each.

There is one other major factor that sets CDs apart. Some CDs are labeled "equity-linked," which means that they are tied to a portfolio that the issuing bank put together.

Doing this offers the possibility of an even higher-yield return than advertised, but it also increases the risk in the case that the bank's portfolio goes down.

In my experience, this is almost always the case, even in growth markets. For much the same reason that I don't let brokers pick my stocks, I refuse to buy equity-linked CDs and do not encourage you to purchase one, despite the possibility of higher returns.

So how do I use non equity-linked CDs to get higher-than-advertised returns?

I build what is referred to as a laddered portfolio. This is where you can purchase a few different CDs with different expiry periods, traditionally one year apart, to combine and pay me the best rate of the day, every year. A major bonus is that you'll have access to a portion of your cash while you enjoy the longer-term rates.

That in itself was a major reason to ladder your CDs when the rates were structured the typical way. But now, as federal interest rates are going up, the tactics are a bit different.

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