It’s been a rough few weeks if you’re invested in the stock market. Calling the market’s moves a roller coaster insults roller coasters. It’s been much worse. After a massive plunge over fears of the coronavirus derailing economic growth, the Federal Reserve sprang into action, slashing rates by 0.5 percent following an emergency meeting to deal with the results of the health crisis.
That move has helped steady the market’s nerves, at least for now, but it’s done little for savers. The interest rates on savings accounts are already dropping in response to the Fed’s action. So the market’s got you concerned? There’s still time to lock in CD rates to help safely diversify your portfolio.
CDs can be a valuable tool for reducing risk
It’s important to move quickly to find CD rates before they plummet, but that’s a good decision only if it works for your financial needs and temperament.
A CD provides a fixed return over a specified time period, all with the protection of FDIC insurance, so that you’re not going to lose any principal on your investment. A CD is a great choice to avoid the market’s ups and downs, providing you diversification and reduced risk.
But a well-diversified portfolio of stocks, such as the Standard & Poor’s 500 index, has achieved attractive long-term returns. The S&P 500 averages a 10 percent return annually over long periods. To grow wealth over time, it’s important to have stocks as part of your portfolio.
So you want to balance high-risk, high-return stocks against low-risk, low-return CDs. And because stocks can be so volatile, investing in CDs can smoothen your return and increase it too, at least in some cases and over shorter time periods.
One way to use them is to have a core position in CDs and then layer on riskier, higher-return assets such as stocks on top of that. Achieve the proper balance and you’ll get good long-term returns, as well as sleep better at night, too.
The stock market’s volatility may be opening some investors’ eyes to the realization that stocks don’t always rise. So it can be important to have a mix of assets to steady your portfolio.
Act fast to lock in a CD
The first step is to determine what you need and whether a CD fits your goals, and then you can determine how to find the best rate and how to use CDs strategically.
But this is an evaluation that you need to do now, even if you don’t opt for a CD. That’s because CD rates are already falling, at least at some banks, following the emergency cut to the fed funds rate. If you’re able to act now, you’ll likely get a better CD rate and avoid the impact of future rate cuts, if they happen.
1. Does a CD fit your goals?
The stock market’s recent volatility may be a wake-up call to many investors who were over-invested in stocks when they needed safer alternatives. Experts recommend that any money that you need in less than three years should not be invested in the market. Because the market can be volatile, that money may not be there when you need it.
So CDs are a good alternative for your short-term money, especially if you know when you might need it. With their locked-in interest rates, CDs can be a source of guaranteed return, especially relative to savings accounts, where rates may fall, leaving you without return.
But if you’ve got decades until you need the money, a broadly diversified basket of stocks may be your best bet. Still, if the market gets choppy, you might want to move some of your money over to CDs, especially if you think the economy may be nearing a top. With money in a CD, you can then have access to cash later when the market may be cheaper in a recession.
2. Shop around for your CD
If you’re opting for a CD, the thing to do is shop around for the best rate. There’s almost no reason to settle for less. While there’s a small chance that your local bank has the best rate, you’ll have a better chance of finding the best rate by widening your search.
And that’s where Bankrate’s CD rate tables come in. You’ll find hundreds of financial institutions offering CDs, and you can filter the market by how long you want to invest the money and by the interest rate, so you can quickly find what you want.
It bears repeating: there’s almost no reason to settle for less than a top interest rate. Lock it in.
3. Get strategic with your CDs
Just because you can invest money in a CD for a predetermined time period, that doesn’t mean you have to invest it all in the same CD. You can actually use CDs strategically to reduce your reinvestment risk, the risk that you have to reinvest at a lower rate when your CD matures.
One of the most popular CD strategies is called CD laddering. With a CD ladder, you invest money for different terms, say, one year, two years and three years. When the first CD matures, you reinvest that money in a three-year CD to maintain the ladder and then repeat the process each year, so that you keep the ladder generating income for you.
A CD ladder helps you enjoy the higher returns of a longer-term CD while still having some access to money with the shorter-term CDs. And because you have CDs at different terms, if interest rates fall, as may happen during a recession, you’re still earning a higher rate on your CDs, at least until they mature. So the CD ladder reduces the impact of falling rates.
Use the recent downdraft in the market to reflect on your own financial goals, and make sure your investments are aligned with them. By re-allocating some of your portfolio to CDs, you can help protect against volatility with a fixed rate of return and put yourself in a position to ride out any bumps in the road with your investments.
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