If uncertainty over oil prices and the stock market has you looking for a safer alternative, it's time to reconsider certificates of deposit...
If uncertainty over oil prices and the stock market has you looking for a safer alternative, it’s time to reconsider certificates of deposit.
Until recently, CDs offered such low rates of return that they hardly seemed worth the bother. But as the Federal Reserve has pushed up short-term rates, yields on CDs are approaching levels not seen since 2001.
There’s a catch: Long-term interest rates are not rising at the same pace. So analysts suggest that investors stick with CDs that mature in less than two years.
A portfolio of these federally insured investments can be a safe harbor in uncertain times.
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“There has been a substantial improvement in the yields of shorter maturity CDs,” says Greg McBride, senior financial analyst with Bankrate.com. “Laddering” is another technique used to reduce risk when investing in CDs.
The strategy is designed to smooth out the peaks and valleys of interest rates by investing in CDs with different maturities.
“But if you’re thinking about setting up a ladder right now, investors should focus on shorter rungs,” says McBride.
Of course, the inability to pull money out of a CD before it matures raises other concerns. Depending on an investor’s financial situation, it might make more sense to simply invest in a money-market account, says Deborah Lucas, professor of finance at Northwestern University.
“Money-market accounts are low-risk and fully liquid, so you don’t get penalized for cashing out,” she says.
Some money-market accounts require minimum balances, and check-writing isn’t always an option. But the rates are often comparable to CD rates.