Every portfolio should be a mixture of different investments with a strategy designed to contain manageable risk and produce income and capital gains. Most investors need a portion of their portfolio to be in very safe and predictable instruments. CDs represent that portion of your portfolio which is the safest. If you are approaching retirement or you are a parent looking at an impending college tuition obligation, you will want some assurance that your investments will not go down in value between now and the time when you need the money. You need to align your cash needs with the maturity of investment CDs.
Three tips for evaluating CDs as an investment that should be in your portfolio are: What is the safest investment CDs; how do you assess the safety of your bank; how important is the interest income?
CDs are among the safest investments because they are an unqualified commitment of a major financial institution that your principal investment will be returned to you, along with interest, at the end of the CD. They fall into a general category of very safe investments that usually includes U.S. treasury obligations (t-bills, U.S. notes and bonds), policies from major insurance companies and very short term commercial paper (loans) from major U.S. corporations. Among those investments, CDs are the investments that are most available to the individual investor. You can purchase them from any major bank.
Further, there are FDIC guarantees for CDs issued by banks. CDs are generally insured by the FDIC for up to $250,000 per investment. For a family, that means you can invest in the name of each spouse to increase the level of guarantee from a specific bank. If you will invest more than the guaranteed amount, you should obtain your investment CDs from two or more banks.
In this day and age when the solvency of banks is called into question, how do you know that your bank is a safe investment for your CDs?Â â€¨â€¨While major financial center banks have had difficult times, it is generally the smallest banks that fail. The key question is the FDIC guarantee. Check that with the institution you are considering, and after that, if you are still uncertain, check the FDIC website to see if the bank is covered.
The interest income from CDs will always be lower than returns than those from more risky investments. In fact, if the interest offered seems to be too high, it is a warning sign that the CD may not have the same safety. CDs represent an important part of your portfolio and should be included as the most stable part of your investments.