CD Ladder - Rudimentary

IGR | Feb 18, 2023 | 580 posts since 2020

I am going in circles trying to educate myself about CD Laddering!

Appreciate if anyone can explain it to me in lame language,

What is the basic premise of CD Ladder and the fundamentals of the calculus behind it?

Everything I've seen so far seems to be based on assumptions, the assumptions are not explained and not computed into outcomes, but comparison and conclusions are made?

i.e., access to funds is advertised, but the returns are compared as if no funds were accessed, CDs are rolled into the same terms with the same rate during multiyear comparison period, etc...

The point of the exercise is that I question the advantage of CD laddering vs. single long term highest rate CD with mild EWP.

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Answers

Kaight | Feb 18, 2023 | 1,192 posts since 2011

CD laddering is a way to ensure you will achieve average CD yields over a long interval of time. You buy when CD APYs are high and you buy when CD APYs are low. You are always buying longer term CDs, and these often offer the highest yields available . . . . . except in the presence of a negative yield curve. When there is a negative yield curve, if you go shorter in order to obtain the best APYs, it messes up your ladder and really is not even "laddering" in the traditional or conventional sense.

Laddering is very, very popular and widespread. It's never been my personal cup of tea. But a great many investors swear by it. "To each his own" I say. My preference is to follow the markets and try instead to beat the averages. Sometimes I fail and get my butt kicked. But at least I'm having fun!

ETA

One additional thought: I believe laddering might have had more viability in the last century before Ken and DA.com exploded onto the scene. Back then CD yield information was tough to come by relatively speaking, relative to today.

Since Ken has been on the job, news of special CD situations is much more readily, and timely, obtainable. Of course you must be a steady DA.com reader to take advantage. But those special CD situations can often be rather lucrative. And they tend to exist outside considerations of laddering. When Ken posts a humdinger of a CD deal, you don't worry about maintaining a ladder; you just grab it!!

Ltssharon | Feb 20, 2023 | 471 posts since 2020

My handle should have been LAZY DAISY. I am so lazy that I like a ladder. If I try to get the highest rates, then I am constantly on the go joining financial institutions, updating documents, cashing in certificates of deposits and treasuries and paying penalties. If I stay in a really long term ladder (say 10 years, then I never have to bother with much work in one year, rather the work of figuring out what to do is just a little work each year.

GreenDream | Feb 20, 2023 | 358 posts since 2019

One of the key points of laddering is it sets you up to always have some funds that will be maturing soon (which provides the access to funds you are confused by) so all your money isn't locked up for years requiring you to suffer an early withdraw penalty should you find yourself in need of some of that money.

Having access to funds isn't the same thing as making use of that access (IE withdrawing). hence why that access is "advertised" but return comparisons don't consider withdraws being made. Same as return comparisons that don't look at EWPs happening.

Another aspect of laddering is that it mitigates against interest rate and reinvestment risk. Putting it all in a single long term highest rate CD with mild EWP is good for that one CD cycle. when that cd matures, rates may be very low and everything will then be getting those low rates. with a ladder you don't have all your eggs in one rate basket, so even if rates are low when one of the CDs in the ladder matures, it's only part of your money that will be "stuck" at that low rate while the rest continue to enjoy the higher rates they were started with. You won't get the highest highs on all your money, but it also won't all be getting the lowest lows either.

happyharold4 | Feb 18, 2023 | 388 posts since 2022

With a ladder you will always have cash at your disposal at different calendar dates without any early withdrawal fees. You normally have a 10 day grace period to make up your mind whether to roll it over or not, Long term CD's means you have no need for liquid monies, but as you keep waiting for the very best rate you loosing interest on shorter term ones while you are waiting.

IGR | Feb 18, 2023 | 580 posts since 2020

As with longer term CD where I am willing to take on EWP. Once I dispose the cash at the maturity or early withdrawn, residual balance remains the same, does it?

MidAtlantic | Feb 20, 2023 | 142 posts since 2012

IGR: Presumably you have seen and read this: https://www.depositaccounts.com/blog/how-to-build-a-cd-ladder.html

IGR | Feb 20, 2023 | 580 posts since 2020

Yes, I sure have. that is one of the reason i am trying to get some clarifications.
The post is not simply juvenile, it is wrong in its presumptiveness and incompleteness.
it makes some falsely absolute claims like "A CD pays a higher rate of return than a savings account." and "CD laddering is a strategy that allows you to take advantage of the higher cash rates offered by CDs" where it doesn't explain the INSTANCES where such statements are true.
it sells, as everywhere, "access to your money regularly" but makes the case of the instance where the money is NOT accessed. it makes the case of 5 years ladder, while it implies that first anniversary makes it 6 years ladder, promotes the opportunity of reinvesting at the prevailing rate (which you hope is higher by now), but doesn't for unrealized interest if the rates are on the rise...and so on and on

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