Maximizing income from CDs

James Stewart of SmartMoney has a counterintuitive strategy for investing in CD's (certificates of deposit, not the musical variety). Instead of buying longer maturities in order to get slightly better yields, he thinks savers should currently be shortening their maturities.

In this environment, I have a suggestion that bucks the conventional wisdom: Instead of lengthening maturities, shorten them. You don't have to give up all that much income; you don't have to worry about rising interest rates eroding your principal; and the short maturities guarantee that, in the event CD rates do rise, you'll be in a position to take advantage of them when your CDs mature.

Given the modest improvements in yield from a one-year CD to a two-year (his article quotes national averages of 2.1% for one-year and just 2.3% for two-years), I think he's right. You might give up a tiny bit of income, but chances seem good that sometime within two years you'll make that up by being able to roll-over into higher yielding CDs.

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Mark Biller is Sound Mind Investing's Executive Editor. Visit www.soundmindinvesting.com to learn more.