Investment Strategies With $10,000 or less #1: CD Ladder
Being a Financial Planner, I am always discussing different investment strategies with clients and colleagues. I would say that we are all tempted to think that the most profitable and easiest strategies are for rich people. We may think that we could be making much more money with $100,000 to invest rather than $5,000. However, there are methods for small investors that can almost replicate the best investment strategies of the rich.
In order to reach the $100,000 mark, we all have to start somewhere. You may think that you don’t have much to choose from if you have a small amount to invest but you are mistaken. There are ways to invest that can optimize your portfolio even if you are a small investor.
#1 CD Ladder
If you don’t want to risk your investment or are looking for a part of your portfolio to be safe, you don’t need a big amount invested to create a CD Ladder. Certificate of deposits are usually available starting at the amount of $500 or $1,000 depending on the product you select.
We call it a ladder because we select terms from 1 to 5 years. So the total capital required for this strategy is a minimum of $2,500. So you invest your money as follows (please note that investment yield is for example purposes only):
$500 in 1 year term at 1.50%
$500 in 2 year term at 2.00%
$500 in 3 year term at 2.50%
$500 in 4 year term at 3.00%
$500 in 5 year term at 3.50%
I put the Certificates of deposit in different colors for a specific purpose to follow.
While having money invested for 1 year at 1.50% may not be very interesting compared to the 3.50%, this will actually provide you with liquidity to invest next year if the rates goes up. At that time, you will invest your $500 in a 5 year certificate of deposit. Why? Look at the color of your certificate of deposit after 1 year:
$500 maturing and being deposited in your bank account (from your 1.50% certificate of deposit).
$500 maturing in 1 year at 2.00%
$500 maturing in 2 years at 2.50%
$500 maturing in 3 years at 3.00%
$500 maturing in 4 years at 3.50%
So you are left with an empty spot in the 5 year maturity area. What is the good news about 5 year certificates of deposit? They offer a bigger yield than shorter terms! Therefore, after the first year you implement this strategy, you will always be taking 5 year certificates of deposit with the highest yields on the market!
Image source: Robert Couse Baker