Tuesday, January 29, 2013

Should CDs Be in Your Portfolio?

Even though bank CD's are delivering historically low interest rates, investors should not ignore them as part of an overall investment plan. If one of your goals in your investment plan is diversification and safety then some cd's in your portfolio can provide this.

Maybe your as old as me and remember the days when cd's had rates as high as 15%. This occurred back in the days when Jimmy Carter was our president and inflation was rampant. I owned CD's at those rates and thought this is not to bad. Fast forward to today when the average cd's interest rate is one percent. Ouch! Why even bother?

According to Bankrate.com, the best six-month CD is paying an annual yield of just over 0.75% and one-year CDs are averaging 1%. These kinds of rates have turned away many previous owners. Many of our retired people used CDs exclusively because they were a hedge against inflation and also gave a nice return you would be able to live on. But today if you factor in inflation, you may even be experiencing "negative real yield" according to the Wall Street Journal. This is why people stay away from them. Why lock in your money for low or even negative returns.

The Benefits of Bank CDs

Is there a silver lining to CDs? One thing is for sure, they are definitely a safe investment. They are guaranteed by the Federal Deposit Insurance Corp. (FDIC) up to $250,000 per depositor, per bank. 

If you want to keep your money in a safe place that is guaranteed other than CDs you can look into U.S. government bonds that offer similar safety. Only problem with government bonds is that they average around 0.17%. For safety, CDs offer a guaranteed return and investment safety. For the small investor CDs provide an easy to understand way to make a small return on their savings.

The Uses for Bank CDs

Cds are about as simple as it comes to a safe interest bearing investment. Part of an overall investment portfolio strategy is having some money in a 100% safe investment vehicle. CDs perform this task well. If you are putting away cash for a future purchase and want it in a safe place then CDs are the way to go. You could be saving for a down payment on a home or a child's education. Long-term savings plans can use CDs as a tool to save for a particular amount of time. The longer the better. CDs can be the place you keep the part of your portfolio that you don't want to expose to market risk. 

Emergency funds can also be kept in CDs. By staggering the maturity dates over the next few years you always will be having one CD maturing. You can either take the money and use it for some emergency situation or re invest it. This technique called the "CD Ladder" allows you to constantly have money coming available for your emergency needs. Having the money this way helps you avoid the need to sell some stock investments in time of need. If you didn't have this easy way to access your cash you would be forced to sell some of your stocks or mutual fund investments. Quite possibly when you need money the most, your stock or mutual fund will be at an all time low. One of the best places to keep idle cash is in a CD.

One place that is offering very generous interest on CDs is CIT Bank. If you want CDs to be a part of your diversified portfolio, they offer some of the highest paying CD interest rates available today. 

Click HERE to view more details or sign up for a CIT CD account and 1.75% APY !

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