CDs & investing: Take advantage of high yields
By Laura Bruce • Bankrate.com

When it comes to rebalancing your portfolio for the year ahead, your goals, time horizons and risk tolerance are of primary importance. Determine the mix of cash, fixed income, stocks and mutual funds that are right for you. That said, we'd like to give some ideas that may help you in that balancing act. 

Fixed income investors did pretty darn well in 2006 and there's a good chance that conservative investors will fare well again in 2007. The question is: Which options are best? Peter Crane, publisher of Money Fund Intelligence, is speculating that more liquid investments are better than certificates of deposit. Crane says we could be in for an extended flat-rate environment and there's little reason to lock up funds. Money market accounts and funds and high-yield savings accounts could be the way to go.

What's essential is to take advantage of the highest yields you can find. Yields are at a level where you could be losing hundreds of dollars in interest if you let your money sit in a typical, low-interest bank account. A $10,000 deposit in an account paying 5 percent earns $500 simple interest in a year. That same $10,000 sitting in a bank money market account will earn an average 0.84 percent, or $84, according to Bankrate surveys.
 
If the Federal Reserve doesn't raise rates any more, we should expect rates generally to hold steady and, possibly, drop to some extent. While the drop may not be big, it wouldn't be startling to see short-term rates lose a percentage point from current levels. Banks have different funding needs and there's always competition at some level for deposits. Those situations present opportunities for you to benefit from high yields. Bankrate's 100 highest yields sections for CDs and money markets/savings accounts can help you find some excellent deals.

Assuming most people will opt to keep a portion of their money in CDs, some financial planners are advising clients who have been buying short-term CDs to extend maturities out two or three years. Others are recommending heavier concentrations in short-term, such as one year or less, and longer-term -- four and five-year CDs with a smattering of buys in the two- and three-year categories. You're the best one to decide what's right for you because you know when you'll need the money.

While cash and CDs should be an integral part of your portfolio, the stock market shouldn't be ignored. Stocks, mutual funds, exchange-traded funds and the like not only protect you from inflation, they help build wealth and should be a part of everyone's portfolio.  

The stock market in 2007 could be a lot like 2006. That means volatility may be the norm rather than the exception. Nevertheless, even if the S&P 500 returns only 7 percent next year, it's worthwhile to be invested.

Most experts advise that you don't try to cherry-pick individual stocks unless you have time for plenty of research and the wherewithal to do it. Index funds, in the form of mutual funds or exchange-traded funds, are often the cheapest and easiest way to match the performance of the market.