Balancing risk and return when constructing a portfolio can be challenging. That is, do you opt to allocate more money toward stocks or safer investments like a Certificate of Deposit (CD)? While stocks may have big upside, there is also sizable downside should the market sink. CDs, on the other hand, may offer families a more stable vehicle for building savings.
Investing in CDs can be a beneficial strategy, and here is what you should know about them and other low-risk options.
Why invest in a CD?
If you have money sitting in a checking account that is not earning any interest, you are missing out on an opportunity to grow your savings with little risk. Moving money into a CD — or a series of them — will ensure that your money is put to work by earning interest. If you can meet the minimum initial deposit and do not need the money for the length of the term (whether three months or three years), a CD may be a top option for bulking up savings. You can also streamline your savings by directing money from a retirement or education savings account to a CD.
Why are CDs considered low-risk?
The return on a CD is tied to the interest rate you are offered. CDs usually feature fixed interest rates, which means overall volatility will not impact the performance of your savings. This is opposed to the price of a security, like a blue-chip stock. Your return on equity is based on what price you buy shares at and what price you sell at, with a big of margin for losses in between.
Is the return on CDs limited in the long run?
The answer is absolutely not. The allure of investing in equities is that you might hit a winner and ride a stock to big gains. Some may then shy away from CDs because they see limited upside in incremental growth offered by compound interest. However, it's important to know that the longer you save, and the more you save, the greater your interest accrual could be.
The interest rate attached to a CD generally increases as the period of time does. So, the interest rate you might get on a one-year CD would normally be more generous than a one-month, incentivizing you to save for longer. The more you put into a CD, the more interest will be earned, as well. This makes them an ideal savings account for retirement of future financial goals. You can time investing in CDs so that they reach maturity when retirement nears, or other life milestones like your kids attending college or having grandchildren.
Do other low-risk options exist?
CDs are a popular and proven low-risk option for investing, and some other alternatives can help you accomplish the same thing. Remember, there's hardly such a thing as "no risk," so be careful in determining your portfolio allocation.
● High-yield money market account (HYMMA): HYMMAs are flexible savings accounts that come with competitive, tiered interest rates that reward bigger balances.
● Health savings account (HSA): Mitigating future risk is easier with an HSA. You may be able to use this tax-advantaged account to meet health care costs or save for the future.
Want to learn more about investing in CDs and other low-risk options? Get in touch with Comerica Bank today. With a range of fixed and flexible rate CDs and digital tools available, we can help you find the right CD, interest rate and period of time to match your savings and financial goals. Contact us for more information about CDs, HYMMAs or HSAs.
