Are CDs Becoming A Worse Investment?

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William Million
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Are CDs Becoming A Worse Investment?

Post by William Million » Sun Mar 13, 2016 5:26 am

CD rates are not really pushing much beyond 2.25%, even for longer terms/higher amounts. Meanwhile, Short-Term Bond Admiral Shares (VBIRX) at 2.7 year duration is up to 1.29% and Short-Term Corporate Bond Index Admiral Shares (VSCSX) also at 2.7 year duration is up to 2.31%. On the tax-exempt side, Limited Term Tax Exempt with 2.5 year duration is yielding .84%.

In other words, I don't see the same incentive that I saw over recent years to tweak out a bit more yield through 5-year CDs, especially with PenFed and Ally rates way down. While bond funds carry some risk of principal loss as rates rise, it shouldn't be that great with shorter duration bonds.

I remember back in 2010 when I lauded a 2.7% Ally CD with a generous 60-day penalty for early withdrawal:

viewtopic.php?f=1&t=59996


Nothing like that around now.

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Toons
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Re: Are CDs Becoming A Worse Investment?

Post by Toons » Sun Mar 13, 2016 7:24 am

CDs in my opinion are safe instruments in which to place your cash.
I consider them Certificates of Depreciation for long term monies.


:shock:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Are CDs Becoming A Worse Investment?

Post by jimkinny » Sun Mar 13, 2016 7:28 am

1-2 months ago I noticed the 10 year Treasury was yielding about 1.8%. This was down from around 2.2% -2.3% in the fairly recent past.

Brokered CDs in the 7-10 year range have followed this trend when I last looked. I would guess direct CDs are following the trend but maybe a bargain will be offered.

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Re: Are CDs Becoming A Worse Investment?

Post by Call_Me_Op » Sun Mar 13, 2016 8:12 am

Toons wrote:CDs in my opinion are safe instruments in which to place your cash.
I consider them Certificates of Depreciation for long term monies.
Then you must feel the same way about bonds, which are no better.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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gasman
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Re: Are CDs Becoming A Worse Investment?

Post by gasman » Sun Mar 13, 2016 8:35 am

The spread from CDs to treasuries has shrunk over the last several months. Within the past year there was about a 90 bp spread between 10 year treasurys and 10 year CDs. maybe 70bp on 5 year treasuries to CDs. Those spreads have come down. My understanding that this was on the high side of historical spreads between treasures and CDs.

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Toons
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Re: Are CDs Becoming A Worse Investment?

Post by Toons » Sun Mar 13, 2016 9:02 am

Bond funds
Regular payments, though amounts vary depending on the underlying bond holdings of the fund.
Potential for capital appreciation

:sharebeer
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Are CDs Becoming A Worse Investment?

Post by john94549 » Sun Mar 13, 2016 10:46 am

CDs were never a bad investment. With a CD ladder, you won't get rich, but you won't get poor.

A CD ladder is where you park it, after you retire.

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Re: Are CDs Becoming A Worse Investment?

Post by Quark » Sun Mar 13, 2016 11:32 am

Toons wrote:Bond funds
Regular payments, though amounts vary depending on the underlying bond holdings of the fund.
Potential for capital appreciation

:sharebeer
Potential for capital appreciation often means potential for the opposite.

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Re: Are CDs Becoming A Worse Investment?

Post by Toons » Sun Mar 13, 2016 11:45 am

Quark wrote:
Toons wrote:Bond funds
Regular payments, though amounts vary depending on the underlying bond holdings of the fund.
Potential for capital appreciation

:sharebeer
Potential for capital appreciation often means potential for the opposite.

Agree completely
No Risk No Reward :sharebeer
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Re: Are CDs Becoming A Worse Investment?

Post by Call_Me_Op » Sun Mar 13, 2016 12:34 pm

Toons wrote:Bond funds
Regular payments, though amounts vary depending on the underlying bond holdings of the fund.
Potential for capital appreciation
...and depreciation.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Are CDs Becoming A Worse Investment?

Post by Gaff74 » Sun Mar 13, 2016 12:48 pm

john94549 wrote:CDs were never a bad investment. With a CD ladder, you won't get rich, but you won't get poor.

A CD ladder is where you park it, after you retire.

I disagree. CDs are not appropriate for some investors. Parking all your money in them at any point could leave you in the poor house. There are no safe investments, only trade offs in terms of risk. The risk of lost opportunity should not be discounted. That's my newbie take on it.

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Re: Are CDs Becoming A Worse Investment?

Post by gwrvmd » Sun Mar 13, 2016 12:55 pm

CDs should be looked at as a type of savings account not as an investment.........Gordon
Disciple of John Neff

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Re: Are CDs Becoming A Worse Investment?

Post by Call_Me_Op » Sun Mar 13, 2016 12:58 pm

gwrvmd wrote:CDs should be looked at as a type of savings account not as an investment.........Gordon
Why? Isn't a bond an investment? And isn't a CD a variant of a bond? Both throw-off fixed interest payments and have a maturity date.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Are CDs Becoming A Worse Investment?

Post by john94549 » Sun Mar 13, 2016 1:10 pm

Gaff74 wrote: Parking all your money in them at any point could leave you in the poor house.
Two points: (1) I don't think I suggested CDs to the exclusion of other investment vehicles, and (2) a ladder of 5-yr CDs has bested inflation for as long as I can recall.

When a rung in my ladder matures, I strive to obtain a yield at or better than the current rate of inflation. Even with ZIRP, it hasn't been too difficult.

This blog might be of interest:

http://www.depositaccounts.com/blog

Ken Tumin regularly updates the best CD rates. Note the best deals on 5-yr CDs. It takes a bit of patience to build a ladder of 5-yr CDs from scratch. Alliant CU, for example, currently offers a 5-yr at 2.2%. Not mind-boggling, but certainly competitive with your garden-variety bond fund. And, unlike bond funds, the NAV in a CD ladder never goes down in a rising-rate environment.

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Re: Are CDs Becoming A Worse Investment?

Post by Gaff74 » Sun Mar 13, 2016 4:07 pm

john94549 wrote: (1) I don't think I suggested CDs to the exclusion of other investment vehicles, and (2) a ladder of 5-yr CDs has bested inflation for as long as I can recall.
I was thrown off by your comment "A CD ladder is where you park it, after you retire."
More and more of my patients in their 90s and beyond are busted flat.
I find myself wondering if it is because they were "too cautious" with their retirement funds.
:?

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Re: Are CDs Becoming A Worse Investment?

Post by rustymutt » Sun Mar 13, 2016 4:19 pm

Toons wrote:CDs in my opinion are safe instruments in which to place your cash.
I consider them Certificates of Depreciation for long term monies.


:shock:
Depending on family status, they can play a huge part of a smart no nonsense approach to investing. For many those lousy CD rates are guaranteed. For a 85 year old woman with a pension and some savings, those rates are all they need. Family is the the only thing more important for an older woman, than higher rates of return. Keep it cool. CD's are in at my portfolio, as I age. Good luck.
I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

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Re: Are CDs Becoming A Worse Investment?

Post by john94549 » Sun Mar 13, 2016 4:45 pm

Gaff74 wrote:
I was thrown off by your comment "A CD ladder is where you park it, after you retire."
I should have said "before you retire". Indeed, I started building my ladder in August of 2006.

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Re: Are CDs Becoming A Worse Investment?

Post by Kuckie » Sun Mar 13, 2016 5:17 pm

Toons wrote:
I consider them Certificates of Depreciation for long term monies
That is so true. CD pays 2 percent. Inflation is 3 percent, Taxes on the CD are 0.5 percent. Result is Depreciation of 1.5 Percent per year

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Re: Are CDs Becoming A Worse Investment?

Post by VictoriaF » Sun Mar 13, 2016 5:18 pm

My problem with CDs is that they require too much work. With bonds, you choose a suitable Vanguard fund and you are done.

With CDs, you monitor the web for the best rates of the day, check your the eligibility for credit union CDs, check early withdrawal penalties, try to estimate how much to put into a CD and how much to keep for the expenses, and then you have to monitor dozens of credit union and bank accounts. I looked at it, and decided that it was not for me. At least not now.

I am not familiar with "brokered CDs." Does Vanguard offer them? Do they pay less than direct CDs?

Victoria
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Re: Are CDs Becoming A Worse Investment?

Post by Toons » Sun Mar 13, 2016 5:19 pm

Gaff74 wrote:
john94549 wrote: (1) I don't think I suggested CDs to the exclusion of other investment vehicles, and (2) a ladder of 5-yr CDs has bested inflation for as long as I can recall.
I was thrown off by your comment "A CD ladder is where you park it, after you retire."
More and more of my patients in their 90s and beyond are busted flat.
I find myself wondering if it is because they were "too cautious" with their retirement funds.
:?
+5
So true.
The biggest risk when it comes to investing is being too conservative in your investments and running out of money :happy
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Re: Are CDs Becoming A Worse Investment?

Post by Toons » Sun Mar 13, 2016 5:20 pm

Kuckie wrote:Toons wrote:
I consider them Certificates of Depreciation for long term monies
That is so true. CD pays 2 percent. Inflation is 3 percent, Taxes on the CD are 0.5 percent. Result is Depreciation of 1.5 Percent per year


:thumbsup
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Re: Are CDs Becoming A Worse Investment?

Post by VictoriaF » Sun Mar 13, 2016 5:30 pm

VictoriaF wrote:I am not familiar with "brokered CDs." Does Vanguard offer them? Do they pay less than direct CDs?
I found answers to my questions. Vanguard offers them, but the rates are dismal. Today's link shows 1-year CDs at 0.8%. An online bank can do better and more flexibly.

Victoria
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Re: Are CDs Becoming A Worse Investment?

Post by Shallowpockets » Sun Mar 13, 2016 5:40 pm

A CD does not seem to be any better than cash now.
Too much money held for too long for low reward. Figure $2k return on one year of your $100,000.
Since bogleheads believe so strongly in the index and that the market always goes up over time why not take that $100k and park it in a fund. Some times on a good day the market goes up 2% and certainly during some weeks. When that happens, take it out. You got your 2% and no year of parked money with penalties for early withdrawal.
Sure, it is timing the market, but we are only trying to make that 2%. Heck, even last year you could have done that and equaled or beat the years return. and this is only part of your money otherwise tied up in a CD.
This last Friday the S&P was up 1.64% in that one day.

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Re: Are CDs Becoming A Worse Investment?

Post by Rob5TCP » Sun Mar 13, 2016 6:08 pm

Shallowpockets wrote:A CD does not seem to be any better than cash now.
Too much money held for too long for low reward. Figure $2k return on one year of your $100,000.
Since bogleheads believe so strongly in the index and that the market always goes up over time why not take that $100k and park it in a fund. Some times on a good day the market goes up 2% and certainly during some weeks. When that happens, take it out. You got your 2% and no year of parked money with penalties for early withdrawal.
Sure, it is timing the market, but we are only trying to make that 2%. Heck, even last year you could have done that and equaled or beat the years return. and this is only part of your money otherwise tied up in a CD.
This last Friday the S&P was up 1.64% in that one day.
What if before you take it out after it goes up 2%; it already has dropped 20%? Do you wait for the first good day it goes over 2%.
I keep my age adjusted balance in non-equities (more CD's than Bonds - though I have a good balance of older I Bonds).

With 10 year corporate yielding a bit over 2.5%; I can do better with CD's. Yes, it is a hassle sometimes.
But I will only bother if I am willing to put 50 or 100k in for 3 years or longer (smaller amounts or shorter maturities aren't worth the hassle to me).
My last few CD's have been about 3% (5 - 7 year)
Comparative corporates single A 10 year; 20 year AAA (3.53%).
Some CD's also have a relatively cheap put option (6 months).

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Re: Are CDs Becoming A Worse Investment?

Post by Rob5TCP » Sun Mar 13, 2016 6:08 pm

Shallowpockets wrote:A CD does not seem to be any better than cash now.
Too much money held for too long for low reward. Figure $2k return on one year of your $100,000.
Since bogleheads believe so strongly in the index and that the market always goes up over time why not take that $100k and park it in a fund. Some times on a good day the market goes up 2% and certainly during some weeks. When that happens, take it out. You got your 2% and no year of parked money with penalties for early withdrawal.
Sure, it is timing the market, but we are only trying to make that 2%. Heck, even last year you could have done that and equaled or beat the years return. and this is only part of your money otherwise tied up in a CD.
This last Friday the S&P was up 1.64% in that one day.
What if before you take it out after it goes up 2%; it already has dropped 20%? Do you wait for the first good day it goes over 2%.
I keep my age adjusted balance in non-equities (more CD's than Bonds - though I have a good balance of older I Bonds).

With 10 year corporate yielding a bit over 2.5%; I can do better with CD's. Yes, it is a hassle sometimes.
But I will only bother if I am willing to put 50 or 100k in for 3 years or longer (smaller amounts or shorter maturities aren't worth the hassle to me).
My last few CD's have been about 3% (5 - 7 year)
Comparative corporates single A 10 year; 20 year AAA (3.53%).
Some CD's also have a relatively cheap put option (6 months).

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Re: Are CDs Becoming A Worse Investment?

Post by whodidntante » Sun Mar 13, 2016 6:10 pm

William Million wrote:CD rates are not really pushing much beyond 2.25%, even for longer terms/higher amounts. Meanwhile, Short-Term Bond Admiral Shares (VBIRX) at 2.7 year duration is up to 1.29% and Short-Term Corporate Bond Index Admiral Shares (VSCSX) also at 2.7 year duration is up to 2.31%. On the tax-exempt side, Limited Term Tax Exempt with 2.5 year duration is yielding .84%.

In other words, I don't see the same incentive that I saw over recent years to tweak out a bit more yield through 5-year CDs, especially with PenFed and Ally rates way down. While bond funds carry some risk of principal loss as rates rise, it shouldn't be that great with shorter duration bonds.

I remember back in 2010 when I lauded a 2.7% Ally CD with a generous 60-day penalty for early withdrawal:

viewtopic.php?f=1&t=59996


Nothing like that around now.
I don't consider CDs safe at all. If you hold a lot of money in CDs, you save market risk but have high inflation risk.

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Re: Are CDs Becoming A Worse Investment?

Post by john94549 » Sun Mar 13, 2016 6:33 pm

Inflation risk? As I noted above, merely rolling your rungs into a 5-yr CD at or above the CPI-U then stated is easy. For the past decade, I have had no problem meeting or beating inflation in my ladder. For example, if one believes the Social Security folks, last year we had "zero" inflation. As in, my Social Security direct deposit went sideways. Meanwhile, I was generating at anywhere from 1.7% (the low) to 5.6% (the high) in my CD ladder*. Mind you, the 5.6% is a 10-yr CD, and an outlier, but you get the drift.

Folks who paint CDs with a broad brush always seem to invoke "inflation risk". The key is to ladder.

*Even today, a 5-yr CD is available from Alliant CU at 2.2%. While unremarkable, it is somewhat typical. Five-year CDs at or above stated inflation (i.e., offering a real return) are not too hard to find.

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Re: Are CDs Becoming A Worse Investment?

Post by Lynette » Sun Mar 13, 2016 8:32 pm

.....
Last edited by Lynette on Wed Dec 06, 2017 12:39 pm, edited 1 time in total.

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Re: Are CDs Becoming A Worse Investment?

Post by mephistophles » Mon Mar 14, 2016 12:15 am

IMHO CD's among the very best fixed income investments out there.

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Re: Are CDs Becoming A Worse Investment?

Post by john94549 » Mon Mar 14, 2016 12:56 am

mephistophles wrote:IMHO CD's among the very best fixed income investments out there.
I agree. FDIC and NCUA insurance is about the closest thing to a free lunch out there. If hedge funds could buy insured retail CDs, trust me, they'd do it in a heartbeat. Your principal is guaranteed by the "full faith and credit" clause. Your principal never fluctuates. Your rate is fixed. In a rising-rate environment, a CD ladder is basically a no-brainer.

I suspect that CDs have the stigma of being "boring", or "losing to inflation". The concept of "boring" is entirely true. As to "losing to inflation", I respectfully submit "untrue". Even today, a garden-variety 5-yr CD at Alliant CU yields 2.2%.

Managing a CD ladder usually involves a modicum of time, once a year (at most). Keeping track of your ladder, well, a pen and legal pad works for me. I am a bit of a dinosaur.

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Re: Are CDs Becoming A Worse Investment?

Post by MIretired » Mon Mar 14, 2016 1:40 am

Agree that CDs are useful at or near retirement, or the need for withdrawals.
If you had a 5-yr CD annual ladder which was half of all your FI, wouldn't you like that diversification compared to just this? :

Image .

Granted CD rates are generally getting lower. But I've only bought them roughly when their yields exceeded similar duration funds. And I count them as part of FI alloc. And I've only bought 1st(direct) CDs.

But I would say that it's not very necessary, unless you worry about taking losses in STBs.
Thing is, I saw myself getting a almost guaranteed loss in STBs in 2013. Which VFSTX did (-1%.)

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Re: Are CDs Becoming A Worse Investment?

Post by john94549 » Mon Mar 14, 2016 1:55 am

MIpreRetirey wrote:Agree that CDs are useful at or near retirement, or the need for withdrawals.
If you had a 5-yr CD annual ladder which was half of all your FI, wouldn't you like that diversification compared to just this? :

Image .
Fixed-income these days is a dart board. Bond funds are useful for re-balancing, but little else. CD ladders are optimal, in my opinion. When in or near retirement, it is noteworthy to look at EWPs. For example, some financial institutions will waive EWPs on partial withdrawals from IRA CDs if over 59 1/2. Most do not. Virtually all will waive EWPs on RMDs, if over 70 1/2, but some do not allow partial withdrawals, even for RMDs*. The devil is in the details, as it were. For retirees, the bottom line: as a general rule GO LONG.

That said, navigating the minefield is not all that difficult, once you get the hang of it. (1) StateFarmBank has the best rates and the most liberal withdrawal policy for folks over 59 1/2 with IRA CDs; (2) PenFed has less attractive rates but a liberal withdrawal policy for folks over 59 1/2 with IRA CDs; and (3) Ken Tumin's blog updates the best CD rates bi-weekly.

The link to Ken Tumin's blog:

http://www.depositaccounts.com/blog

*The "workaround" is to carve up your CDs. One can easily renew a $250K CD with 5 $50K CDs. Guess I'm getting a bit deep in the weeds, but I think you get my drift.

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Re: Are CDs Becoming A Worse Investment?

Post by Quark » Mon Mar 14, 2016 5:13 am

Gaff74 wrote:
john94549 wrote: (1) I don't think I suggested CDs to the exclusion of other investment vehicles, and (2) a ladder of 5-yr CDs has bested inflation for as long as I can recall.
I was thrown off by your comment "A CD ladder is where you park it, after you retire."
More and more of my patients in their 90s and beyond are busted flat.
I find myself wondering if it is because they were "too cautious" with their retirement funds.
:?
More likely they didn't save enough to support their spending.

All CDs lacks sufficient diversification and is likely a mistake for the vast majority of investors. Just don't go too far the other way. It's one thing to talk about being "too cautious" when stocks are doing well and are close to their all time highs. It's another when the risk of stocks manifests and slashes portfolio values.

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Re: Are CDs Becoming A Worse Investment?

Post by carolinaman » Mon Mar 14, 2016 8:03 am

Kuckie wrote:Toons wrote:
I consider them Certificates of Depreciation for long term monies
That is so true. CD pays 2 percent. Inflation is 3 percent, Taxes on the CD are 0.5 percent. Result is Depreciation of 1.5 Percent per year
Inflation (CPI-U) was .1% and .8% the past 2 years. The last time it was at 3% was 2008. We are in a period of low inflation which makes 3% CDs a pretty good fixed income investment.

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Re: Are CDs Becoming A Worse Investment?

Post by digit8 » Mon Mar 14, 2016 9:31 am

VictoriaF wrote:My problem with CDs is that they require too much work. With bonds, you choose a suitable Vanguard fund and you are done.

With CDs, you monitor the web for the best rates of the day, check your the eligibility for credit union CDs, check early withdrawal penalties, try to estimate how much to put into a CD and how much to keep for the expenses, and then you have to monitor dozens of credit union and bank accounts. I looked at it, and decided that it was not for me. At least not now.
I agree that if one is looking to maximize the returns of a CD, the effort is probably not worth it in today's environment, hasn't been for awhile, and that trend will probably continue for at least a few years.
However, I've spent the last few years with an add-on option CD in the same credit union I have my savings account. It's just a way I know I'll earn a little more then standard savings. Blip a few bucks to it every month, no stress, no muss.
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Re: Are CDs Becoming A Worse Investment?

Post by abuss368 » Mon Mar 14, 2016 10:34 am

Certificates of Deposit are very safe investments for cash. They should provide peace of mind for anyone who is risk adverse.
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Re: Are CDs Becoming A Worse Investment?

Post by SpringMan » Mon Mar 14, 2016 11:11 am

Many newer laptop computers won't play my CDs. :(
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Re: Are CDs Becoming A Worse Investment?

Post by dollarsaver » Mon Mar 14, 2016 8:31 pm

mephistophles wrote:IMHO CD's among the very best fixed income investments out there.
Totally agree. I've followed numerous contributors on our blog for years on this matter. I've read many books from our most coveted authors. As it's been said over and over, risk should be taken on the equity side. I'm currently 55% equity, 40% bond (CD's) and 5% cash. Half of my "fixed" income side is in PenFed's 3% IRA CD's and Northwest Federal Credit Union 3%, 3 year IRA CD's. The remainder of my fixed income is in Vanguard Total Bond Index Fund.
When more favorable rates become available in years to come, I'm back to CD's.

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Re: Are CDs Becoming A Worse Investment?

Post by joe8d » Mon Mar 14, 2016 8:47 pm

Don't go more than 1 year on a CD.
All the Best, | Joe

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Re: Are CDs Becoming A Worse Investment?

Post by DireWolf » Mon Mar 14, 2016 9:12 pm

I will probably start a CD ladder, but not until rates get up to 5%.

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Re: Are CDs Becoming A Worse Investment?

Post by supernova » Mon Mar 14, 2016 9:15 pm

I would use a CD over a bond fund if I had a choice right now.

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