Parallel CDs vs. CD Ladders

March 3, 2009
By Kevin Cafferty

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You can try several different strategies in your search for the best CD rates. Our friends over at TheStreet.com have an interesting article up about Parallel CDs -

Building a CD (certificate of deposit) ladder is a common strategy investors employ to benefit from CD's high interest rates while still having access to their cash at set intervals. But setting up a ladder takes time and effort. Depending on how much money you're working with and the flexibility you need, another idea is buying parallel CDs - a few CDs set to mature at the same time -- instead of building an entire ladder.

I would like to address an issue about CD Ladders that TheStreet puts forth here - building a CD ladder USED TO take time and effort. MoneyAisle's recent addition of CD Laddering to our investment options takes both the time and the effort out of building a CD Ladder - you can build an entire investment portfolio almost instantly by running multiple CD auctions at once for different durations in the ladder.

Buying parallel CDs is a much simpler strategy: you buy several CDs with the same maturity date. If you need to withdraw, you pay a penalty, but the hit you take with the fee is minimized since your money is invested in multiple CDs instead of just one.

The issue I take with this section of the article is this: If you build a ladder with staggered returns - 3-month CDs, 6-month CDs, etc. - the chance of some of your money becoming available when you need it becomes much more likely when the maturity dates are staggered every three months. If you buy multiple one-year CDs and spread your money across several different banks, you'll still face a possible early withdrawal penalty if you need some of that cash.

Now, there are situations where Parallel CDs could be useful to an investor - if you have more than the FDIC limit and wish to spread your money across several FDIC-Member banks (which is something you can also accomplish at MoneyAisle by running subsequent auctions for CD rates - you can even exclude the bank that the first CD is in to ensure you'll have your money spread across multiple FDIC-insured CDs.)

I'd love to hear your thoughts on the Parallel CD vs. CD Ladder debate.