CDs are a savings rate investment that make people feel good. Like a bond they have a coupon and maturity but unlike bonds they are understood by nearly everyone who invests in them.
That's one aspect that makes them very attractive. Besides their simplistic design, the FDIC guarantee makes them a sweet deal for risk-averse investors.
But, in the current market, their simplicity and government-backed guarantee to principal come at a high cost. CD rates stink right now and it's expensive, in terms of opportunity costs, to tie your money up in an investment that doesn't provide a reasonable rate of return.
"When an investor looks at an investment they should always look at the risk -- return scenario, the risk -- return scenario for CDs is minuscule. If there is any type of inflation, which has been highly forecast, and, is being orchestrated by every central bank in the world right now, you're going to lose money in real terms," says Bill Larkin, fixed-income portfolio manager at Cabot Money Management.
Buying at today's yields could lead to losing purchasing power down the line but to get more yield investors have to get into bonds.
"Many of the corporate bond investments, short-term, high-grade, have done very well and the returns are two to three times (that of Treasuries and CDs) so if you look at the risk that is a risk worth taking in this market," Larkin says.
"The investor that invests in CDs is very scared and they are willing to pay a very high premium for the return of their principal," he says.
What do you think? Are you sticking with CDs or have you taken on more risk while waiting for interest rates to rise?