My times have changed! A while a go, I was looking at CD investment alternatives given they paid so poorly. Now, after an aggressive Fed rate hike cycle, CDs are actually paying handsomely!
The good times for high CD interest rates will unlikely last, as inflation and interest rates come down. However, at the moment, earning over 5% on a CD is relatively attractive. This is despite inflation still above 5%.
In the past, CDs were a stable part of my overall investment portfolio. Whether it was a bull market or a bear market, I would always invest roughly 10% of every dollar saved in the longest CD possible since college.
The goal was to not only have some risk-free assets, but to eventually get neutral real estate by buying a place to live.
Although I lost around 35% 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 20% of my net worth intact. The feeling was very comforting, especially when yields were over 4%.
CD Investment Alternatives
As CD interest rates come down again, I think it's prudent to invest in risk assets like stocks and real estate crowdfunding again.
Here are some other CD investment alternatives.
1) Refinance or pay down debt. Refinancing a mortgage or locking in a new mortgage when you can lower your payments makes sense. Credible is a leading lending marketplace where pre-qualified lenders compete for your business.
2) Treasury bonds. An alternative to buying a CD is buying Treasury bonds. Treasury bonds are more tax efficient because you don't have to pay state or local tax.
Personally, I'm very bullish on rental properties because the value of cash flow has gone way up. Further, real estate is a key component of inflation, which is currently elevated. Rents and real estate prices ride the inflation wave.
3) Search for higher online savings accounts. It's interesting, but money market accounts are sometimes paying higher than CDs. If you want a place to keep your risk-free money, then look at an online bank for higher interest rates. CIT Bank has the highest yielding savings accounts I've seen.
4) I Bonds. I Bonds are paying a healthy 6.89% guaranteed. The guaranteed rate will likely stay elevated through 2023. Unfortunately, you can only buy $10,000 worth of I Bonds per account.
5) Invest in real estate. My favorite CD investment alternative is real estate. As interest rates decline, the value of real estate increases. Real estate is a tangible asset that holds its value, provides utility, and generates income. For the majority of people, investing in real estate is the easiest way to build wealth.
You can either buy physical rental properties, as just mentioned, or real estate online. For example, you can invest in a Fundrise fund that invests in residential property in the Sunbelt, where valuations are lower and yields are higher. As I get older, I enjoy investing more in 100% passive investments.
Disclaimer: Credible Operations, Inc. NMLS# 1681276, “Credible.” Not available in all states. www.nmlsconsumeraccess.org.
Always Remember Everything Is Relative In Finance
When looking at CD investment alternatives, it's good to realize everything is relative in finance.
When you have the 10-year treasury bond providing a ~3.4% return, your hurdle rate is very low. There is a good chance a monkey can randomly choose 10 stocks to build a portfolio that will beat these returns if history is any guide.
The dividend yield of the S&P500 alone is around 1.6% for goodness sake. The 10-year bond yield is the hurdle you need to beat to make an investment worthwhile. Otherwise, why bother taking any risk when you can earn 2.9% a year risk-free.
My conservative investment target return has always been around 2-3X the risk free rate of return. In other words, if you are to put your money at risk, you should expect at least a 6.8% return or higher over a year.
Why You Might Not Want To Invest In CDs Today
- Not tax efficient
- Inflation rate is still higher than the best CD rate
- Locking up money for years reduces your liquidity
- The S&P 500 dividend yield is around 1.8%.
- Private real estate funds like the ones from Fundrise are providing a ~8%-16% returns due to lower valuations in the heartland of America.
- Another bull market could be on the horizon once the Fed starts cutting interest rates again
Detailed Overview Of CD Investment Alternatives
Here are the most logical and risk-appropriate CD investment alternatives today. Remember, you invested in a CD because it is risk-free/low-risk. Therefore, you want to be objective in your CD investment alternatives.
1) High Interest Savings Account.
For those who are absolutely risk adverse, investing money in a high yielding online-only savings account is the safest move. For example, you can earn great rates at CIT Bank in both their Platinum Savings and Savings Connect accounts.
The reason why bricks and mortar banks can't offer as high of a rate than banks like the online banks is due to much larger overhead costs
2) The Stock Market / Dividend Stocks.
Investing in the stock market is the riskiest CD alternative, but it's also straightforward thanks to retirement savings vehicles such as the 401k, IRA, as well as online brokerage accounts. Investing in the stock market is not a comparable alternative to risk-free CD investing at all as we learned during the recession.
That said, low interest rate returns on CDs force us to take more risks. So far, the S&P 500 has gone up massively since February 2009. The question on every investor's mind is: how much longer will the good times last?
10% of my net worth is in CDs because I'm content with 4% risk-free returns. 35% of my net worth is in real estate because although real estate is a fantastic way to build long term wealth, real estate is leveraged risk. You can read about my experience with private real estate over the past seven years.
No more than 35% of my net worth has ever been exposed to the stock market because the 1997, 2000, and 2009 implosions destroyed tremendous wealth and sent many friends to the poorhouse for going all-in at inopportune times.
One way to invest in the stock market is Empower, the original digital hybrid wealth advisor that leverages technology to customize an investment portfolio based off your risk tolerance. It's free to sign up and explore what type of investment portfolio they might build for you. You can link your existing investment accounts and manage your portfolio for free.
3) Debt Repayment Of Any Kind.
It's generally better to have less debt than more debt. If you have legacy debt that has a stubbornly high interest rate which cannot be lowered, then paying down debt is the safe alternative. Examples of legacy debt include student loans and mortgage rates at over 4% and any type of credit card debt, which averages above 12%.
There is a triple benefit to paying down your mortgage early. But before you do, justrRemember to always think in relative terms. Besides the economics of paying off debt, there's also a positive mental benefit as well. I paid off my 2.75% business school loan debt early because I simply found the debt annoying. Getting rid of the burden felt tremendously satisfying.
Do note that refinancing your mortgage to a lower rate is considered debt repayment. During the refinance process, a bank literally pays off your entire existing loan and gives you a new loan with a better rate in its place.
See the latest mortgage rates with Credible. They have one of the largest networks of lenders who compete for your business so you can get the best rate possible. Take advantage and see what's available today.
4) Bonds / Municipal Bonds.
Bonds have historically returned 3% – 5% and have also provided much less volatility than stocks. But bonds have also suffered from a decline in yields along with the long decline in government bond yields. If you are in a 28% or higher federal income tax bracket and pay state taxes, you may want to consider investing in municipal bonds, which allow investors to earn federal and state tax free income.
The risk of investing in bonds now is that rates are still low and inflation remains high. I'm personally buying a California municipal bond ETF, CMF, which provides a ~2.5% yield as part of my low-risk portion of my investment portfolio. See: The Case For Bonds: Living For Free And Other Benefits
5) Real Estate Crowdsourcing.
Investing in real estate in cheaper parts of the country is currently my #1 focus for where I'm allocating capital to build more passive income so we can stay retired. Instead of investing hundreds of thousands of dollars in one specific property, I'm investing $20,000 – $50,000 in various commercial or residential real estate crowdsourcing deals.
My favorite platform is Fundrise, which has managed funds. It's free to sign up and explore.
The average return for Fundrise platform investors has ranged from 8% – 10% a year for the past several years. During times of stock market volatility, Fundrise diverse eREITs tend to outperform.
Another great real estate crowdfunding platform is CrowdStreet. CrowdStreet focuses on individual real estate opportunities in 18-hour cities. 18-hour cities have lower valuations, higher cap rates, and higher growth rates.
The spreading out of America is real, especially after the pandemic. People want to live in lower-cost areas of the country and employers are letting them with the advancement in technology. Riding this investment trend is why I've invested $810,000 in real estate crowdfunding so far.
Saying Goodbye To CDs Is Not Hard To Do
When CD rates are low, we must look for CD investment alternatives. Perhaps if you are super risk adverse, already in retirement, and have no other passive income whatsoever, CD investing is appropriate. However even then, a 70 year old can find greater returns in often criticized annuities.
I also strongly encourage everyone sign up with Empower, a free online wealth management software, to keep track of your money. I used to manually update my net worth in an Excel spreadsheet once a quarter. Now everything is done for me so I can spend my time analyzing my overall net worth and making sure it is properly balanced.
My number one goal is to continuously grow my net worth in good times and in bad times. I'm bullish on the economic recovery. For CD investment alternatives, I plan to continue investing in stocks and real estate to take advantage.
Manage your money wisely. Nobody cares more about your money than you!
Related: Reinvestment Ideas Instead Of A CD. CD Investment Alternatives is a Financial Samurai original post.
Is it time to revisit CD’s 6month 2.1%?
Was reading your bonds article and talking with Fidelty on how to analyze bonds. Seemed so complicated (article didn’t help process). CD’s easy order, FDIC insured, short term hold wait until rates go up and repurchase at a higher rate by year end.
Great site overall! Would like more help on analysis but understand if that’s not your thing.
CDs and bonds are definitely looking more enticing now after the big rate increases since the beginning of 2022.
I had to laugh when you mentioned President Trumps policies damaging bonds. As we can see due to voter stupidity we new have Joe clueless Biden who is single handedly destroying the USA by giving free money, inviting every illegal immigrant/refugee in, and excusing everybody’s debt. I paid my school bills and all those with college debt need to do the same.
Nice site to keep up on investing ideas. Your answers seem very reasonable kind of like a Dear Abbey for different reasons of course. Thanks.