CDs, for a Return Guarantee

The Certificates Are Safe, but They Can Also Tie Up Money

Sometimes boring is beautiful.

With the stock market whipping investors along gut-wrenching swings of 200 points or more in a day, the steady-as-she-goes FDIC-insured certificate of deposit has lately become an attractive shelter.

For Lisa Bend, the time to act came when she kept seeing reports that the Federal Reserve may soon lower interest rates, which could cause CD rates to drop. Wanting to lock in a good rate, Bend, 43, recently put a portion of her retirement savings into nine- and 12-month CDs from Internet bank ING Direct. She got an annual percentage yield, or APY, of 5.25.

"I had it sitting there, and I didn't know what to do," said Bend, who lives near Philadelphia. "I was looking at the stock market going up and down and up and down the past month."

A safe investment, surely, in volatile times. But there is a price to be paid for a guaranteed return. If you tie up your money for six months to a year or two, you could miss out if stock prices suddenly take off again.

So CDs, while a stable refuge, work most effectively as one component of a portfolio. Over the long term, stocks provide the best opportunity for your assets to grow. Historically, the U.S. stock market has offered investors annual returns averaging a little more than 10 percent if dividends are re-invested.

"Most investors are best with a diversified mutual fund portfolio," says Joe Garrison, a certified financial planner with Strategic Wealth Management Group in Columbia. Such diversification would include stock funds, bond funds and money-market instruments in a mix tailored to match the risk an investor can comfortably bear. Generally, the more time the investor has until the cash is needed, the greater the share that can be devoted to stocks.

CDs can fill a niche for many investors, even those comfortable keeping most of their money in stocks. They are particularly attractive for people in or nearing retirement who cannot afford to risk losing principal or interest. They're also useful for younger investors who would like to park money that they will need in six, 12 or 18 months for a tuition payment, a car, vacation or the down payment on a home. Stiff early-withdrawal penalties, often equal to three to six months' interest, are a strong incentive to keep your hands off the money until the CD matures.

The investments are not paying bad returns, considering that most guarantee not only your principal but also the interest it is slated to earn. And if you're among those betting that the Fed will lower its benchmark short-term interest rate when it meets Tuesday, you might want to follow Bend's lead and lock in the higher CD rates sooner rather than later.

Early last week, annual percentage yields averaged between 3.53 percent for six-month CDs to 4 percent for those maturing in five years, according to Greg McBride, senior financial analyst for Bankrate.com, a Web publisher that tracks consumer interest rates available nationwide. Shopping can get you an above-average rate of up to 5.5 percent for the highest-paying CDs, he said.

"Typically, CD yields move in advance of Fed action; however, we haven't yet seen that move play out," McBride said. "If there's a screaming 'buy' signal for CDs, that's it."

A search for the best rates should include Internet-based banks as well as local banks and credit unions. Some banks offer Internet-only deals that carry a slightly higher yield than available through their branches, according to McBride.