CDs are a good investment

Are certificates of deposit worthwhile compared to an investment on the stock exchange?


A CD is guaranteed to pay its return on maturity. So, if at some point in the future you need a certain amount of money, the CD is a more reliable way to get it. The stock market could give you more money or less. Obviously, more is fine. Less is not if you intend to use it to pay the basic costs, e.g. B. food, rent, etc.

Most retirement portfolios have a mix of investments. Some securities (stocks and bonds), some guaranteed returns (CDs, government bonds) and some cash equivalents (money market, savings and checking accounts). Cash equivalents are good for short-term expenses and an emergency fund. Guaranteed returns are good in the medium term. Securities are good in the long run.

After retirement, the general system is to maintain enough cash equivalents for the next few months of expenses and emergencies. Then plan CDs for the next several years so that you have a predictable amount. After all, you keep most of your wealth in securities. As you age, your potential emergencies increase and your savings needs decrease, so the mix shifts more and more towards cash equivalents and guaranteed returns and away from securities.

There is limited use of CDs prior to retirement (and in the few years immediately prior to retirement). This saves mainly on large purchases such as a house, a car or a large appliance. Even there, if you have the option to delay the purchase, you may be able to use securities instead. Maybe part of your emergency fund in a short-term CD that you roll over and over again.

Note that the problem isn't so much that the securities are falling. It so happens that they drop right when you need the money. Instead of selling 1% of your securities to meet your needs, you have to sell 2%. That's a 1% weight loss to subtract from your return on investment. That's roughly the same as the 2007 S&P 500 decline to its low point in 2009. And it was 2012 before it recovered. If you had put 1% of your portfolio into a two-year CD in 2007, you would be ahead in 2009 even with zero interest rates.