Investing in the stock market has become increasingly risky during the past decade. It is not uncommon to see short term swings of ten or fifteen percent in either direction. While this may be an acceptable risk for a younger individual, older investors, or those on a fixed income, really need to consider a safer investment vehicle for their money.
One investment option that is perfect for even the most risk-adverse investor is a high yield certificate of deposit.
Many banks offer certificates of deposit, or CDs, that have extremely competitive interest rates when compared to a basic checking or savings account. As such, CDs make an attractive way to diversify your investment portfolio. Before you rush out to your nearest bank there are a few things you need to carefully consider before investing any of your money.
1. FDIC Insured Part of the attraction of a high yield certificate of deposit is its safety. If you invest in a CD that is not fully insured by the FDIC you might as well invest your money in the stock market. Additionally, you need to be aware of any dollar amount limitations. Currently the FDIC will ensure certain bank investments up to $250,000.
2. Liquidity One of the major drawbacks with CDs are penalties related to early withdrawals. You should always check to see if your bank charges a fee if you need your money back before the CD matures. In many cases you can be assessed a fee as much as one months interest.
3. Interest Rate Traditional CDs are available primarily with a fixed interest rate. While it is nice to be able to determine exactly how much money this investment will earn you may lose out on some income should interest rates, in general, rise to a level that is higher than your stated rate.
4. Date of Maturity – When investing in a high yield CD it is crucial that you know its maturity date. Many people focus on the rate of interest that they will be receiving with no regard for how long their money will be tied up. If you are going to need your principle returned before the maturity date you may need to consider investing in a different option.
Certificate of deposits are a wonderful addition to any fixed income investment portfolio. In addition to being extremely safe they also generally require little, in any, attention until they fully mature or are call by the issuing institution.