In the financial world, stocks and equity-based mutual funds often get a lot of attention. And deservedly so, because they often form the core of a portfolio. But to help you achieve your goals, you may also want to consider a wider range of investments, one of which might be a certificate of deposit (CD).
As you know, a CD earns interest on a lump sum over a set period. You can buy CDs with maturities ranging from a few months to 10 years or more. In general, the longer the term of the CD, the higher the interest rate, although this is not always the case.
In recent years, CD rates have been quite low, reflecting the general interest rate environment. But now, as the Federal Reserve has repeatedly raised interest rates to fight inflation, CD rates are also rising. In fact, one-year CDs can currently be found paying in the 5% range, a rate not seen in over 15 years. Later in 2023, however, if the Fed eases rate hikes, or perhaps even begins to reverse them, CD rates could fall again.
You can buy a CD from a bank or buy a “brokered” CD from a financial service provider. The income you get from a CD can be its main draw, especially if rates stay high for a while. But there’s another key benefit to holding CDs: They can help diversify a portfolio of stocks and mutual funds that are generally more susceptible to movements in the financial markets. A portfolio that contains CDs as well as bonds and government securities can help reduce the effects of market volatility. Keep in mind, however, that diversification cannot guarantee profits or prevent losses in a declining market.
While adding individual CDs can be valuable, you can get greater benefit from a more strategic approach known as scaling. You can build a CD ladder by buying a series of CDs that mature at different dates in the future, perhaps one month, three months, six months, nine months, and 12 months, or even a long-term ladder from one to five years. . In any case, as a CD matures, you can use the money if you need it or reinvest it in another “rung” of your ladder. If interest rates rise, the reinvestment option may be attractive, but if available CD rates are lower than your maturing CDs, you may be able to find better uses for your money. And you’d still have your long-term CDs, possibly paying higher rates, working for you. You should assess whether a range of CDs and the values they hold are consistent with your investment objectives, risk tolerance and financial circumstances.
How much space CDs take up in your wallet should depend somewhat on your stage of life. If you’re a long way from retirement, you may want to have a larger percentage of growth-oriented investments. But once you retire and getting more income from your portfolio becomes more important, you may find a greater need for CDs.
Either way, CDs can be useful for your overall financial strategy, so give it some thought.
Jennifer Barrett (AAMS) is a local financial advisor at Edward Jones.
225-612-0413 | jennifer.barrett@edwardjones.com
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Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate planning attorney or qualified tax advisor regarding your situation.
This article was written by Edward Jones for your local Edward Jones Financial Advisor.
