CDs are great for short-term savings or as part of an overall strategy. What makes them unattractive, despite their safety, is the low yield. In today's rate environment CD rates are no match for inflation.
Just to keep up with an inflation rate of 2 percent, $100 invested in a five-year CD today would need to earn about $10.
According to a recent rate survey by Bankrate, the average five-year CD yield is 1.19 percent. An investor would gain $6.09 after five years on a $100 investment.
"For short-term savings, a CD is very appropriate. But I don't think a CD is a very productive long-term investment at all," says Lance Scott, president of Bay Harbor Wealth Management in Baltimore.
"A lot of older investors find themselves in the CD trap. They will be in a CD for a short period of time, and then before they know it they've rolled it over for years," Scott says.
However, some yield is better than nothing. Investors may find it more worthwhile to take the paltry yield on a one- or two-year CD over staying in cash for a portion of their portfolio.
Hopwood suggests keeping some money in CDs "just because there is a penalty for keeping it in cash right now -- cash is basically yielding zero."