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For the foreseeable future, savers and investors in CDs will find themselves with limited options. The twin pressures of persistently low interest rates combined with rising food and energy prices can drive investors to take on more risk than they would prefer, whether that's by extending maturities, taking on more credit risk or finding more volatile investments.
Though there aren't great options for reinvesting funds from maturing CDs, there are options. The alternatives to CDs are not without their risks however.
One surefire, safe bet is rolling over the investment into another CD. Investors can find safe, FDIC-insured investments with competitive yields using Bankrate's CD rate tables.
On the other end of the spectrum, the best investing news these days is in stocks. However, in general, stocks are an inappropriate stand-in for FDIC-insured CDs. One reason for that is price volatility. It's very easy to lose money in equities or equity mutual funds, particularly over the short term.
With a longer investing horizon, dividend-yielding stocks may be appropriate for some investors who want more yield and can withstand the possibility of roller coaster prices.
"There are a number of attractive dividend paying stocks where you can get yields of 2.5 (percent) to 3 percent. The risk is that the underlying stock price can be volatile, so we would only recommend this option for money that you do not need for a longer period of time, like 5 years," says Jim Wright, chief investment officer at Harvest Financial Partners in Paoli, Penn.
For instance, Wright says, "If you buy Johnson and Johnson, they raise their dividend every year so if you buy it, you'll get a raise. But, if you buy it at $64 now there is no guarantee that you will sell it at $64, it could be $42 or it could be $100. But you can be reasonably confident they will pay their dividend."
That option should be reserved for money you can afford to risk losing. Shorter term investments need to be more conservative.
"There's nothing wrong with keeping your money in CDs, but you may be able to improve your yield in the bond market if you look you might be able to find some options," says Wright.
He recommends high-quality corporate bonds for conservative investors.
Mark Byelich, president and founder of M.J. Byelich and Associates in Trevose, Penn., likes structured CDs such as currency or equity-indexed CDs.
One selling point with structured CDs is that investors get FDIC insurance with exposure to more volatile markets.
But, what sounds too good to be true can have some serious downsides.
They can be very illiquid; depending on the product, early withdrawals may not be allowed.
Also, "You have to be aware of the caps," says Byelich. "Where the issuing company makes their money is by putting a cap on the upside growth. If an index makes 10 percent they might cap it at 8 percent and keep the spread."
Structured CDs are much more complex than a regular CD. Investors interested in structured CDs should read the prospectus and feel confident that they understand the terms of the investment.
There can also be complicated fee structures. Make sure you understand how much of a commission payment is built in.
Check out the Bankrate story "Indexed CDs offer investor protections, risks" to learn more.
I'm curious if anyone has invested in a structured CD and is pleased with the results. Based on my reading and conversations with investment advisers, it seems that more people dislike these products than like them. If you've bought one, what do you think?
What are the advantages and disadvantages of Fixed Annuities? They seem similar to CDs but have benefits similar to IRAs.