In the financial world, stocks and stock-based mutual funds often get a lot of attention. And deservedly so, because they often form the core of a portfolio. But to help achieve your goals, you may also want to consider a broader array of investments — one of which may be a certificate of deposit (CD).
As you may know, a CD earns interest on a lump sum for a designated period. You can purchase CDs whose maturities range from a few months to 10 or more years. Generally, the longer-term the CD, the higher the interest rate, although this isn’t always the case.
In recent years, CD rates have been pretty low, reflecting the overall interest-rate environment. But now, as the Federal Reserve has repeatedly raised interest rates to combat inflation, CD rates are rising, too. In fact, one-year CDs can currently be found paying in the 5% range — a rate that hasn’t been seen in more than 15 years. Later in 2023, though, if the Fed eases up on rate hikes, or perhaps even starts reversing them, CD rates could fall again.
You can purchase a CD from a bank or buy a “brokered” CD from a financial services provider. The income you receive from a CD may be its main attraction, especially if the rates remain elevated for a while. But there’s another key advantage to owning CDs: They can help diversify a portfolio of stocks and stock 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, though, that diversification can’t guarantee profits or prevent losses in a declining market.
While adding individual CDs can be valuable, you might get a greater benefit from a more strategic approach known as laddering. 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 out, or an even longer-term ladder of one to five years. In either case, as one CD matures, you can use the money if you need it or reinvest it to another “rung” on your ladder. If interest rates are up, the reinvestment option might be appealing, but if the available CD rates are lower than your maturing CDs, you could find better uses for your money. And you’d still have your longer-term CDs, possibly paying higher rates, working for you. You must evaluate whether a CD ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances.
The amount of space occupied by CDs in your portfolio should depend somewhat on your stage of life. If you’re a long way from retirement, you may want to own a larger percentage of growth-oriented investments. But once you’re retired and getting more income from your portfolio becomes more important, you might find a greater need for CDs.
In any case, CDs may prove useful to your overall financial strategy — so give them some thought.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member SIPC
Kirk E. Doyle, AAMS®