Certificates of deposits, aka CDs have long been a stable part of my overall investment portfolio. Whether it was a bull market or a bear market, I would always invest roughly 30% of every dollar saved in the longest CD possible since college. Although I lost around 30% of my net worth during the worst of the crisis in 2009, I knew that even if everything went to hell I’d have at least 30% of my net worth intact. The feeling was very comforting, especially when yields were over 4%.
Unfortunately or fortunately, times have changed due to the Fed’s stance on keeping rates low until 2016 if not much longer. I strongly believe that low interest rates are here to stay for a while. We’ve still got a lot of economic slack in our economy to keep significant inflation at bay. Policy initiatives are also much quicker and more effective thanks to technology. As a result, everybody should:
1) Refinance their mortgages, call their credit card companies, and consolidate their student loans. Refinancing a mortgage or locking in a new mortgage at current low rates is a no brainer given the Fed has signaled they will be raising interest rates in 2016 and beyond.
2) Be more amenable to taking on debt at the margin to build wealth e.g. buy real estate, invest in a business.
3) Look at all other investments besides CDs.
The best CD interest rate I can find is 2.2% for a 10 year CD in 2015. The funny thing is, 2.2% is not bad given the 10-year yield is at around 2.2% as well. It’s better to lock up your money for only five years versus 10 years, after all.