CDs – Still Not a Good Long-Term Investment Strategy
When a client has accumulated savings that they don’t plan to use in the near future, they often wonder what they should do with their money to make it work harder for them (aka grow more). One of the first questions we ask is, what is the likely timeframe for the money? If it’s less than two years, a CD or money market account at a bank might be a good idea. Two years or less is too short of a time to take on any significant risk.
Beyond that timeframe, a CD is likely not a good idea, and there may be even better temporary solutions at the current short-term interest rate levels. Many money market funds (funds that own mostly short-term treasuries) are also paying very good interest rates (5% +) with no timeframe, meaning you have access to your money when you want it.
Below is an example of what some other interest-bearing options are paying (as of the end of July). The 5-year treasury sits at 4.39% as of this writing.
Investing in a CD can also be akin to kicking the can down the road, and in some cases a futile attempt at market timing. ‘I will invest in this CD now until things “settle down” a little bit in the markets.’ Reminder, global stocks are up about 13% this year, and taking on risk has been rewarded. You are also tying up your money in a CD and will pay a penalty if you need to get to the money prior to maturity. We understand that poor performance in 2022 across all non-CD investments still hurts, but sticking to a longer-term strategy remains paramount.
Lastly, you will be faced with the exact same decision when the CD comes due. What market gains will you have missed out on? Is your CD maturity date the perfect time to invest in the markets now that “things have settled down?” The majority view of economists’ forecasts is that rates will be lower one year from now, so you are also taking on interest rate risk.
Range of Economists’ Forecasts for US Fed Funds Rate
Yes, I will admit that we are biased when it comes to investing in anything that we perceive as being “out of the market,” but staying the course (invested) over time has proven to be the right move in almost all cases. A CD can be the right option in certain situations, but it is usually best for short-term money with a known need to spend the proceeds at maturity.
A diversified portfolio means you will almost always own some conservative holdings to act as a ballast and not fluctuate as much as other things in your mix. So, if you look closely enough, you might find that you already own some things that are paying high interest rates.
As my son said when he looked at the above photo, it’s like Yin and Yang!