With our lousy economy and a bear market to boot, investors everywhere are looking for safe, dependable profits. In many cases, that means Certificates of Deposit (CDs), and we want to make sure you're getting the most from your CDs.

When you buy a Certificate of Deposit, you lock in a set interest rate for a specific period of time. For example, you could invest in a 6-month CD with a 3.2% rate, or a five-year CD returning 4.3%. (You might be able to do better at your bank.)

There are two big problems: First, once you invest in a CD, it's hard to get that money out before maturity without a hefty penalty. And, second, no one knows for sure which direction interest rates will go and how fast they will move.

So ... do you sign up for a 6-month CD, a 5-year CD, or something in between?

It's a tough choice. If you go with the shorter maturity and interest rates go down during the term of the investment, when you go to open your next CD it will be at a lower rate. On the other hand, if you do a longer-term maturity and interest rates go up, you're stuck with the lower rate, maybe for years!

It's precisely for these reasons that we're big fans of a strategy called CD laddering. (The nimble bond investor may also utilize this strategy, but we'll be talking about CDs here.) CD laddering is a strategy that will both protect you from interest-rate fluctuations and give you the peace of mind that you will have access to at least a portion of your money within a relatively short time span.

Let's show you exactly how it works.

The Best of Both Worlds

Simply stated, when you "ladder" your CDs, you spread the amount of money you want to invest over several different maturities instead of purchasing a single CD and locking into one single maturity. Each maturity is like a different rung on a ladder.

Generally, you won't earn as much with this strategy as you would by investing all of the money in longer-term maturities, but you are better able to control interest-rate risk. By staggering maturities, you give yourself the flexibility to adapt your strategy depending on how interest rates are behaving.

• If interest rates go up, you have short-term maturities coming due that you can then roll into another CD with the higher interest rate.
• However, if interest rates go down, you can relax knowing that you still have a significant amount of money in longer-term maturities with the higher rates.

Next: A Sample Laddering Strategy

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