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Steps to SUCCESS

Investors who rely on bank CDs for safety and steady income are getting a rude introduction to risk: While their principal may be guaranteed, their income is not.

The risk isn't really new. Investors always have been at the mercy of prevailing market rates whenever one of their certificates of deposit matured. But reinvestment risk is easily ignored when rates are rising or relatively stable.

Now that rates have fallen sharply, investors are learning just how risky a supposedly safe CD can be. Even the best one-year CDs yield less than 4 percent these days, compared with more than 7 percent a year ago.

"Every time I turn around, there's a drop," St. Petersburg retiree Catherine Williams, 76, complained. "I can't live on 1.5 or 2 percent."

While investors still can do a little better than 2 percent, CD rates are the lowest they have been since 1984 when researchers at (known as Bank Rate Monitor in the pre-dot-com days) started collecting the numbers. And they are not likely to improve any time soon because the Federal Reserve is trying to shore up the weak economy by keeping short-term interest rates low.

So what's a CD investor to do?

Comparison shopping is one obvious solution, but it isn't the only one. Building a CD ladder is a simple but effective strategy that often is overlooked.

A ladder is a portfolio of CDs with varying maturities, put together and then maintained with an eye to improving yields without increasing risks. The basic concept is to start with a portfolio of CDs that will mature at regular intervals, such as every six months or every year. Then when the shortest-term CD matures, it is replaced by a new CD at the longest original term.

For example, a typical portfolio might start out today by dividing your available funds and buying one-year, two-year, three-year, four-year and five-year CDs. After the first year, replace the maturing one-year CD with a new five-year CD. After four years, the entire portfolio would consist of five-year CDs, staged to expire in sequential years.

Five-year CDs typically offer higher yields than short-term CDs so the average yield on the portfolio should increase over time. But the risk does not change. A five-year CD with one year to maturity is the risk equivalent of a one-year CD.

So why doesn't everybody have a laddered portfolio?

"It's something you have to stay on top of," Homosassa retiree Harold Hayes, 71, said. He said ladders have worked well for him, but it is easy _ and sometimes even tempting _ to stray from your predetermined strategy.

If you fail to contact the bank when your one-year CD comes due, your money will be rolled over automatically into a new one-year CD instead of the five-year CD you need to make your ladder work.

Sometimes you might be tempted by a better rate the bank is offering on a CD with a maturity other than the one you are supposed to buy.

When Hayes has new money to invest, he finds it difficult to resist putting it all in five-year CDs to earn the highest rates right away instead of following his ladder strategy.

"But you don't want everything to come due in five years," he said.

That would be the equivalent of putting all your eggs in one basket, simply moving the reinvestment risk five years into the future. With interest rates as low as they are today, yields most likely will improve during the next five years. Regularly maturing CDs offer the opportunity to take advantage of rates on the way up.

At the other end of the CD investing spectrum are retirees who keep all their money in very short-term investments, such as money market funds and one-year CDs, often for fear they might need the money to cover medical bills or other emergencies. They have been the most severely affected by this year's dramatic rate decline.

Ladders are not limited to CDs. They can be used with any kind of income investment with a set maturity date, such as government or municipal bonds.

Financial planner Margery Schiller of Goar, Endriss, & Walker in Sarasota recommends ladders as an alternative to bond mutual funds.

"If you have to sell a bond fund, you have no control over what it will be worth because it's always sold at the market price," she said. "But if you do a ladder of individual bonds or individual CDs, you know that X number of dollars will mature each year and if you can wait until that maturity date, you won't be penalized."

But investors who buy individual bonds need to pay very careful attention to credit quality since a default on even one bond can be a substantial blow to a portfolio.

"We are avoiding high-yield bonds," she said. "If we are moving to a deeper recession, that could lead to more defaults."

Treasury notes and bonds often have been used in ladders, but these days they offer lower yields than CDs. Savings bonds are in some ways a substitute for five-year CDs because they can be cashed without any interest penalty after five years. However, savings bond yields change every six months, so there is no long-term rate guarantee.

Yield shoppers can find out about some of the banks offering above-average yields by checking the nationwide high yields published on page 4 of each Sunday's Money & Business section and the sampling of local yields published each Wednesday in the Times' regional editions. Because the local charts offer only a sampling of rates, it's best to use them for comparison and shop around yourself. The Internet also helps with yield comparison sites such as, and

_ Helen Huntley can be reached at or (727) 893-8230.

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