Respect for the humble CD?
When the stock market turns volatile, people take a second look at fixed-rate investments, including certificates of deposit. In a bull market, the CD may seem like just about the most unattractive investment choice out there. But during downturns, those who own CDs can be thankful for their cautiousness.
A classic interim investment?
Often, people choose to put money in a CD when they are “between investments” – that is, as they move a portion of their assets out of the market or a market sector for the short-term. While leaving the stock market altogether is a laughable and ill-advised idea for the serious, committed investor, most CDs are FDIC-insured and thereby offer safety of principal (up to $100,000) along with a guaranteed rate of return.
A CD is certainly a commitment: you can’t pull the money out of one until the end of the specified term. (If you need to withdraw your money, you’ll almost always pay an early withdrawal penalty.) You also want to find a CD that offers returns sizable enough to keep ahead of inflation and taxes. With interest rates still near historic lows, it may be tough to find attractive rates.
The tradeoff of a CD is easily expressed. We all want CDs with higher rates of return, but this usually means CDs with longer periods until maturity. The longer the wait, the longer the investor goes without access to those funds, and the greater the potential opportunity cost of not assigning those assets to an investment that might perform better.
What About Index-linked CDs?
Some CDs offer you the chance to earn stock-market like returns. As the term implies, index-linked CDs are linked to the performance of a particular stock index. Often, they will match 90-100% of the return generated by an index, and some offer guaranteed minimum returns regardless of how the linked index performs over the term of the CD.
Should you move money into a CD?
For the short-term, given this challenging market, it is an option to consider for a portion of your money. Far too many retirees put their full nest egg in CDs which is often a very costly mistake in the long run. Before you make a move to a CD, be sure to speak to a qualified financial advisor about your financial direction – for today, and for the long term.