CDs & investing 2006: Interest rates keep rising
By Laura Bruce • Bankrate.com

As the stock market rocked back and forth between overbought and oversold in 2006, less-nimble investors who didn't take profits off the table fast enough may have wished a lot more of their portfolio was in fixed income.

Aficionados of high yield certificates of deposit, money market accounts and money funds have enjoyed an excellent year. Yields climbed steadily as the Federal Reserve Board's Open Market Committee routinely hiked short-term interest rates.

It was a welcome change from the skimpy returns that dogged the short-term fixed income market ever since January 2001 when the Fed started knocking down short-term interest rates meeting after meeting, culminating in a 1 percent fed funds rate that lasted from June 2003 to June 2004. 

Of course, we knew the goose couldn't lay little golden eggs forever. The rate hikes stopped in August, and it's anyone's guess when the Fed will decide the economy's pendulum is swinging too far in the opposite direction and decide to start cutting rates again.

Inflation and world unrest were major themes in 2006. Gold, the proverbial security blanket during shaky times, caused quite a stir when the price per ounce started rising to levels that hadn't been seen in 20 years. Gold peaked at $850 an ounce in 1980 only to wither to $255 by 2001.

The price of the precious metal had been in an upward trend since then, but not many everyday investors noticed. By the start of 2006 it had climbed past $500 and in May it topped out around $722. As so often happens, folks who bought at the high may have to wait quite some time to see their investment pan out.

Economists seemed to spend considerable time pondering whether inflation was a problem in 2006. Consumers weren't scratching their noggins: They knew it was a problem as insurance, tuition, utilities, medical, food and gas costs emptied their wallets faster than their paychecks filled them.

Oddly enough, the government's inflation-fighting security known as the I bond took a wild swing down from its November 2005 pricing of 6.73 percent to a mere 2.4 percent when it was repriced in May 2006. The move left many customers confused as they were sure they were laying out a lot more cash for just about everything. Apparently, fluctuating energy prices had fallen during the previous six months and were just on their way up again, so they didn't count.

With a survey, Bankrate.com quantified something just about everyone knew -- Americans are woefully unprepared for a financial emergency. Our survey revealed that only 39 percent -- fewer than four out of 10 adults -- have the minimum emergency fund of three months' living expenses set aside. It's an especially disturbing statistic considering that experts say that six months' living expenses should really be the goal.

And finally, on the legislative front, President Bush signed into law the Federal Deposit Insurance Reform Act of 2005. Perhaps one of the more popular things this law does is increase FDIC coverage to $250,000 on retirement accounts, which some say is a long overdue change.

However, Congress couldn't manage to increase FDIC coverage on general accounts, which remains at $100,000. It is the same cap that's been in effect since 1980, although Congress did allow it to be indexed for inflation beginning in 2010.