CD RATES: THE LONG AND SHORT OF IT

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

When it comes to investing in certificates of deposit, some investors tend to be shortsighted. In an effort to minimize risk, they invest in short-term CDs and simply roll their money into other CDs as their investments mature.

This seemingly sound investment strategy unfortunately often exposes investors to another risk -- being forced to invest your money at a lower rate of interest. This shortsightedness can have negative effects on the long-term performance of your CD investment.

For instance, consider the following two investors.

Investor A invested $50,000 in a one-year CD in 1992. When his CD matured he simply reinvested another $50,000 into another one-year CD. He did the same the next three years.

Investor B divided $50,000 equally among five CDs, a one-year CD, a two-year CD, a three-year CD, a four-year CD and a five-year CD in 1992. When each CD matured, he invested $10,000 in a five-year CD.

Over the five years the CDs were held, Investor B earned $1,545 more in interest than Investor A. In addition, Investor B enjoyed a much steadier income stream; the difference of income between his best and worst years was $705. For Investor A, the difference was $2,125.

Of course, past performance is no guarantee of future results, but in most situations, Investor B's investment strategy will produce a more attractive return than Investor A's.

This investment strategy is called laddering maturities. By owning a portfolio of CDs that mature in successive years, you'll maximize return and minimize interest-rate risk. If interest rates rise, you'll have a CD maturing within a year to reinvest at higher rates. On the other hand, if interest rates decline, other CDs will still be locked in at the higher rate of interest, protecting part of your income.

Laddering doesn't completely eliminate the risk of interest-rate fluctuations, but it does allow you to earn dependable income over several years and still have money available when you need it. In the long run, you'll minimize risk without sacrificing return.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.

Investor A's Rate of Investor B's Initial Investor B's Rate of

Return (all 1-year CDs) Rate of Return Return when Reinvesting

1992: 3.30% 1992: 1-year CD: 3.30% 1993: 5.20%

1993: 3.40% 2-year CD: 4.00% 1994: 6.35%

1994: 5.05% 3-year CD: 4.60% 1995: 5.90%

1995: 5.40% 4-year CD: 4.75% 1996: 6.25%

1996: 5.55% 5-year CD: 5.35%