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Financial Literacy - Financial tuneup
OVERVIEW
Investing fundamentals
Here's the lowdown on the pros and cons of the basic types of investments.
Investment tuneup

Building blocks for successful investing
Investments:
Stocks
Mutual funds
Bonds
TIPS
REITs
ETFs
CDs

CDs
Certificates of deposit provide a fixed interest rate for a stated amount of time. Most CDs have a minimum purchase amount and charge a penalty for withdrawing the principal early. Because of their modest guaranteed return and low risk, they add stability to an investment portfolio.

In general, longer-term CDs pay a higher return than their short-term counterparts. Correlated with the interest rate moves by the Fed, CD yields vary over time. Laddering CDs can guard against the fluctuations of interest rates over time. Rates, investing time frame and the direction of the economic tides could determine the length of a CD ladder.

"If I'm doing a 24-month ladder, I may end up buying three or four different CDs with varying maturities, six months, 12 months, 18 months and 24 months," says Howell. "That way I have a CD coming due every six months and as that CD comes due, I check the interest rates and see what kind of yields are available. And if at that point we're still keeping a 24-month ladder, I'll roll it into another 24-month CD."

Like rebalancing your portfolio at the end of every year, reinvesting in the longest term in your ladder smoothes out returns and removes the guesswork of market timing.

Advantages and disadvantages of CDs
Pro
Insured by the FDIC, CDs are low-risk, guaranteed investments.
Con
Low liquidity. "Nowadays, there are online banking accounts, which get a pretty aggressive rate of return, and they are more liquid," says Friedhoff. "I would recommend that if you're going to need the money, you go with a savings account. Or if you're going to put money aside for a number of years, you may be better off with bonds or the stock market."
-- Updated: June 11, 2009
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