Rock-bottom CD rates are about as popular with Americans as TSA pat downs and ticket scalpers. Anyone who has money languishing in CDs paying little to no interest is probably pretty annoyed about it.
But if low CD yields are really hurting you -- reducing your ability to meet basic expenses or forcing you to go into debt to make ends meet -- it's possible you're relying too much on CDs in the first place.
Our own Dr. Don has an interesting article this month that touches on the dangers of all-CD portfolios:
My concern with a portfolio that's only invested in CDs is that the investor is overly preoccupied with risk to principal and hasn't considered how purchasing power risk is impacting the value of the portfolio. I'd advise you to get professional advice on managing your portfolio. If you can't get comfortable with the advice, get a second opinion. The Bankrate feature, "Financial planners: not just for millionaires anymore," can help.
You know the disclaimer offered by makers of sugary breakfast cereals? That they're healthy "as part of a balanced breakfast"?
I think the same disclaimer could apply to CDs: They're great as part of a balanced portfolio, but if all you invest in is CDs, your wealth will be eroded as surely as your teeth would be on an all-sugary-cereal diet.
I can understand the allure of an all-CD portfolio, especially in these uncertain times. It's secure, it pays cash interest at regular intervals and laddering can smooth out the rough patches. But just as Dr. Don says, it's important to remember that no investment is entirely risk-free. Sure, your principal is safe, but CDs' real returns rarely outpace inflation. Especially if you're spending your some or all of your CD yields on everyday expenses instead of rolling them into your principal, the spending power of that principal is going to shrink every year.
Especially for retired investors, not wanting to put money into investments that risk principal like stocks and corporate bonds is understandable; in the financial crisis, all-CD investors probably felt like geniuses as the stock market crashed and big, established companies were defaulting on their bonds while their CDs escaped unscathed. But CDs are, in the end, a game of diminishing returns. Even when CD yields are decent, they're going to be paid on an amount of money that is steadily diminishing in value.
I think a better approach is to take Dr. Don's advice and find a fee-only Certified Financial Planner to build you a conservative but balanced portfolio that won't leave you struggling every time CD yields are low.
What do you think? Are all-CD portfolios better than a portfolio with some riskier investments, like stocks and corporate bonds, included?