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Better Rates Heating Up CD Market
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"There's a big difference between the average rates available and what you can find if you're willing to be a free agent and send your money to the highest bidder," McBride said.
His advice comes with one caveat: don't go overboard. CDs are no replacement for a diversified portfolio.
"Don't think this is a market timing solution," he said. "If you have a definite cash need at some point in the next couple of years, a CD is perfect. If you're looking to diversify your portfolio by including cash investments, CDs are perfect for that. But it's not a solution to someone who is nervous about market volatility."
Consumers still should invest in accordance with their goals and time horizon. If you're 50 years old, saving for retirement and nervous about volatility in the market, you may want to diversify and put some of your holdings in cash -- but not all, financial advisers say. You need to keep some money in stocks for long-term appreciation and to benefit from the eventual rebound from the current malaise.
CD buyers also should be careful about how long they lock up their money, said Herbert G. Hopwood III, president of Hopwood Financial Services in Great Falls.
If you put your money in a 10-year CD, inflation will likely eat away at your long-term return, but it is less likely to have an impact in just three or six months. So if you put all your money in short-term CDs out of inflationary fears, you run a risk when they expire that rates will have gone down and you've lost a chance to lock in at a higher rate.
"The Federal Reserve and Treasury have no concern about inflation," Hopwood said. "The dragon they're trying to slay is deflation. They're probably going to cut rates again."
Hopwood is a big advocate of laddering, a strategy in which you don't put all your money into one rate of return and or in CDs of the same duration. For example, you invest equal amounts in CDs with maturities of one, two, three, four and five years. When each comes due, you roll it into a five-year CD, keeping the maturities coming at regular intervals and providing a steady flow of interest income. Laddering also lets you maintain a degree of access to your money and helps protect it from both inflation and interest rate shifts.
"We laugh when we see people on CNBC say the market is going to be up, down, or sideways," Hopwood said. "With interest rates you don't know either. A lot of it is not in our control."
