CDs Are Back In Style

For the past 20 years or so, old-fashioned saving has gone out of style. Back in the 1980s and 1990s, you could build a fairly respectable—and guaranteed—return on your retirement portfolio by buying bank certificates of deposit.

Since then, of course, we’ve encountered one seemingly endless economic crisis after another—the dot com bust, the 2001 terrorist attacks, the 2008 global financial crisis, and the 2020 Covid-19 pandemic—that have basically forced the Federal Reserve to lower interest rates to or near zero percent.

That policy, of course, largely destroyed the CD (certificate of deposit) market and forced savers, however reluctantly, to buy stocks instead, because There (Was) Is No Alternative, or TINA.

If you wanted to earn any kind of return on your portfolio, you really had no choice but to buy stocks, either directly or through mutual funds and ETFs.

And that strategy has paid off pretty nicely for most people over the past two decades, provided they could stomach the roller coaster ride that the stock market has put them through over that time.

Until now.

Now the Fed has suddenly re-discovered monetary restraint in the form of higher interest rates to slay the inflationary beast it helped to create.

Since the end of last year, when the Fed finally came around to the notion that inflation wasn’t transitory and signaled that the party was over, stocks and bonds have tanked. If your retirement portfolio is only down 15% or so since then, consider yourself lucky.

But there is a positive flipside to the Fed’s new hawkish interest rate policy, and that is that it is now fashionable—and financially savvy—again to start shopping in the CD market. (If you’re in the market to buy a house, however, with mortgage rates now at 7% and rising, I’m afraid you missed the boat.)

Instead of following the stock market’s gyrations, mostly southward, here’s something that might cheer you up a little. Visit the brokered CD page on Schwab or Fidelity or wherever your account is and take a look at the rates being offered. I think you’ll be both surprised and pleased. You’ll want to party like it’s 1999.

Here’s a sampling of the highest CD rates available at Schwab at the beginning of this week:

• One month: 3.3%
• Three months: 3.7%
• Six months: 4.2%
• One year: 4.5%
• Three years: 4.7%
• Five years: 4.75%

Yes, you read that right. You can earn more than 4% by locking up your money for only six months.

Not many companies are paying a reliable 4% dividend on their stocks, and none that I know of where the payment is insured and the price of the underlying stock is guaranteed not to fall. CDs, however, are guaranteed by the full faith and credit of Uncle Sam.

Now, you probably can’t get those same high rates at your bank — hey still think the fed funds rate is at zero, not 3.25%. You can usually only get these rates at a brokerage firm. But that’s hardly an inconvenience — quite the contrary. A couple of clicks and you’re done.

Of course, there are some drawbacks to investing in CDs. If you need your money before the CD matures, you may have to pay an early withdrawal penalty, usually the forfeiture of some of the interest you would have earned—although not the principal. Each bank has its own rules on penalties. But you can also sell your CD on the secondary market through the brokerage you bought it from, just like a bond.

There is another risk, albeit a small one. The Fed has made it pretty clear that it has no intention of stopping interest rate hikes over the foreseeable future, which means rates on CDs are likely to go up from here. So it may pay to wait if you want to lock up your money longer at a higher rate.

Then again, you can park your money in a one- or three-month CD and check back later, like early next year, when a five-year CD may be earning more than 5%.

Of course, by then it may also be safe again to jump back into the stock market. But maybe not. In the meantime, you’ll be earning a decent—and guaranteed—return on your money.

So if you’ve had it with the market’s gyrations and want to sleep better at night, the CD market is once again a good place to live. Remember, investing is supposed to be boring.

George Yacik
INO.com Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.