It's looking ugly out there for people who depend on CDs as the primary drivers of their portfolios. Ultra-low CD rates have downgraded the usefulness of even laddered CDs as a long-term investment tool; many CD investors are stuck rolling over maturing CDs with decent rates from a few years ago into the record-low rate CDs of today.
But despite low yields, CDs still have their uses. Here are a few roles they can still play in your financial life.
- Protecting a windfall -- To prevent a major splurge and keep their new-found cash safe, recipients of windfalls can turn to CDs. CDs can provide a safe-haven, a small but certain return, and a few months or years to consider how best to spend that cash.
- Holding cash for a major, scheduled purchase -- Because they have a defined end date and a better return, in some cases, than savings accounts, CDs can be useful for locking away a lump sum payment such as the down payment on a car or house.
- Holding retirement cash in the run-up to your retirement date -- If you're lucky enough to have a predetermined retirement date, a CD can be a good way to hold the cash portion of your retirement portfolio and earn a little interest while you're at it. Not only is it immune to the fluctuations of the stock markets, but the fact that it's a timed deposit will help soon-to-be retirees resist spending their nest egg before retirement starts.
- Safeguarding the cash portion of an investment portfolio -- If you feel better having a portion of your portfolio in a secure, non-volatile investment to ride out market volatility, you can do a lot worse than a CD. Treasuries have traditionally served this role in many portfolios, but with a global flight to safety driving Treasury yields even lower than CD rates, it might be a good idea to consider CDs instead.
One more thing: If you're looking to get a CD to fill any of these roles, keep in mind that, while the average one-year CD yield is just .42 percent, you can easily find rates over 1 percent on Bankrate's CD rate tables.