Should I Buy CDs During A Stock Market Correction?

During times of stock market weakness, like during the vicious March 2020 sell-off, it's a common knee-jerk reaction to find as many safe havens as possible. Some are happy to keep their money in money market accounts. If you are wondering: Should I buy CDs during a stock market correction? The short answer is that it depends on your current net worth allocation.

If your net worth barely has any risk-free or low-risk investments, then buying CDs during a stock market correction can make sense. If you already have plenty of liquidity, buying CDs during a stock market correction is fine too. But things are a little interesting now because interest rates are so low.

Others like to shove their bills under their mattress. I prefer allocating my truly risk-free money to a higher yielding online bank or to Certificates of Deposits. Bonds can lose value, especially if you aren't willing to hold them to maturity.

This post will discuss deploying your capital in CDs for capital preservation versus investing more money in the stock market during difficult times. The stock market has had a tremendous rebound since 2010, and it's my belief that investors should start building a 12-month CD ladder now.

I've invested a portion of my net worth in CDs for the past 20 years and will continue to do so with a portion of my savings. 

When To Buy CDs (Certificates Of Deposit)

The #1 pushback I get from people who don't want to buy CDs is that interest rates are too low. Even when a CD was yielding 4%, people complained because the stock market was returning an even greater amount. Stock jockeys with little experience thought they couldn't lose in 2007. Then they lost their shirts, their pants, and their Storm Trooper underwear when the stock market melted down in 2008.

After a long bull market, stock investors who've started investing in the stock market think with the same cavalier attitude today. Why invest in a CD when you can find stocks with upside potential! The answer is simple. I'd much rather make a guaranteed return in a CD than lose money in a bear market cycle. Stocks are down around 15% YTD (as of Sep 2022) and remain volatile into the second half.

The main takeaway everybody needs to understand about CD interest rates (returns) is that everything is correlated. For example, CD rates can vary depending on current and expected inflation rates, the demand for less risky or risk-free assets, stock markets volatility, and if central banks are accommodative or not. Financial risk and reward are always entwined.

As financial freedom seekers you must balance your liquidity needs with your desire for returns. Let me suggest a mental checklist you should first complete before deciding whether or not to invest in CDs.

1) Decide how much of an Armageddon Fund you need.

If you get laid off, your business shuts down, and all your other income streams die off, you are screwed unless you've got a large enough Armageddon Fund to hold you through until the eventual rebound.

Those who did not have an Armageddon Fund did foolish things in the last downturn, like default on their mortgages and sell stock at the bottom. Think of the Armageddon Fund as the big brother of all your emergency funds. A normal emergency fund usually only provides you with six months of living expenses. The Armageddon Fund should get you through years of lean times.

My ideal Armageddon Fund size is $1,000,000 in multiple CDs yielding ~$25,000 in interest a year. I figure that if all goes to hell, I can at least move back home to Hawaii and live for free while surviving off $2,084/month until the world recovers. If I had to live off more, I'd start eating my principal.

2) Decide what percentage of your net worth should be in risk-free assets.

I generally advise people to have 5%-10% of their net worth in risk-free assets like CDs. It all depends on your net worth size, your income generating abilities, your age, and your level of risk-tolerance. Generally the more greedy, stupid, or inexperienced you are, the more you will be unwilling to allocate to risk-free assets. I've created several fundamentally important net worth allocation frameworks for you to follow.

A larger net worth can afford you a lower percentage in risk-free assets if your expenses are under control. For example, having $380,000 in CDs, $1,500,000 in stocks, $1,200,000 in real estate, $300,000 in bonds with $100,000 a year in annual expenses is a reasonable net worth composition.

Almost 10% of your net worth is in CDs, which will cover 3.8 years worth of living expenses. By then, the economy should have hopefully turned around. Thankfully, we all have the ability to cut our expenses and make our money last longer if necessary.

3) Develop a system of methodically contributing to risk-free assets.

The reason why automatically contributing to your 401k to the max every paycheck is a no-brainer is because you ensure that you're saving money before a single dollar is spent. You'll wake up 10 years later and more than likely have over $200,000 in your 401k without really feeling the burden of saving. Therefore, for your CD contributions, you must also allocate a set amount of money hopefully after maxing out your 401k.

An easy way to go about achieving 10% – 20% of your net worth in CDs is to simply allocate 10% – 20% of your savings towards CDs. But since it's better to build a CD ladder and shoot for longer durations to get higher yields, consider saving the CD money in a liquid online savings account until you reach a particular amount of money to deploy. The amount you deploy will once again depend on your liquidity needs and cash flow. A good figure to shoot for is at least $10,000 per CD investment.

If you are fortunate enough to get a large enough year end bonus (or maybe even a tax refund), you can allocate a certain percentage to buy CDs in chunks as well.

Historical CD Rates
CD Rates are rising again

4) Mind the gap.

If you decide to reach for yield and invest your $10,000+ tranches in five year CDs or longer, then you must be mindful of the five year gap. During this five year time period, your CD money cannot be touched without paying a penalty, or surrendering at least six months worth of interest income if you've held the CD for longer than one or two years. Once you “survive” the five year gap, you will then have CDs come due at a regular intervals if you have consistently built your CD ladder.

I consider the early withdrawal penalty beneficial because it forces me to never touch my CD money. The government realizes it's tempting to spend money. Think how easy it is to stuff your face with desert if the cake is sitting in front of you. This is why the government also imposes early withdrawal penalties on IRAs and 401ks to help protect you from yourself. During the gap, I'm busy trying to build new income streams for financial freedom.

5) Review your cash and net worth allocation regularly.

Cash management is important to manage financial stress. Cash management is also necessary to insure you are never stuck in a bind.

A net worth review forces you to make sure your financial plan is on track. During bull markets, people tend to throw risk out the window and invest in whatever is working. The opposite is true during a bear market. I review my net worth once a month because it's easy to just thumbprint login to my Personal Capital mobile app. The first thing that always pops up is my Cash holdings. From there, I can see my entire net worth composition and cash flow.

Personal Capital Dashboard - Buy CDs
Sample Personal Capital dashboard to review net worth and cash holdings

Fighting Greed, Fear, And Satisfaction

Greed, laziness, and not experiencing difficult times are really the biggest reasons more people don't invest in CDs. People will do mental gymnastics and say that if they invest X amount in Y company,they can make more money than with low yield CDs. Admit it. You know you've done it.

But I will tell you something extremely important. The pain of losing money is much greater than the joy of making more money. The more money you have, the more this feeling is true. When you've accumulated FU money, your number one priority is to protect your principal at all cost!

Most of us are working towards some ideal net worth and income that we feel will make us happiest ($5M net worth and $250K income respectively, according to FS surveys and analysis). As a result, we should consider various types of investments to achieve our goals.

Below are returns from a $250,000 CD I invested in in 2010. The CD returned close to $80,000 before it matured, providing risk free income of over $1,000 a month.

CD Investment - buy CDs

Could I have made more if I dumped the $250,000 into the S&P 500? Indeed I could have because the S&P 500 was up about 60% since (~$400,000 vs $323,000). But hindsight is always perfect.

But don't feel sorry for me just yet because I followed my investing game plan and invested more in the S&P 500 in 2010. Further, there was a priceless feeling that no matter what happened in the markets or to my risky finance job, I would come out seven years later with over $323,000.

Do not underestimate the feeling of financial security with a CD. Being able to know that everything will be OK no matter what is priceless. Since the mid-90s we've had the Asian crisis, Russian Ruble crisis, multiple wars, SARs, the housing crisis, the self-inflicted Brexit, and Global Pandemic. The markets will continue to be rocky. Thankfully, if we wait for a long enough period of time, the markets recover. However, sometimes we don't have the luxury to wait things out.

If you haven't reviewed your net worth and allocated at least 10% of your net worth in risk-free assets like CDs, I highly encourage you to do so. Continue to also follow a disciplined investing game plan of dollar cost averaging into the market because there will inevitably be a recovery. You'll worry less about your future, make better financial decisions, and be much happier in the process.

Summary For Why You Need Risk Free Assets:

1) You want enough money to feel financially secure during difficult times.

2) You need enough money so that you don't panic sell during difficult times.

3) You develop the good financial habit of diversifying your assets during good and bad times.

Please don't confuse brains with a bull market. The time for caution is when everybody is deliriously bullish. Buy CDs for peace of mind and security. You should always have at least 5% of your investable assets in low-risk or risk-free assets.

Related posts:

If Given A Choice, Always Pay Cash

Don't Forget To Optimize Your Returns On Your Savings

How To Make Lots Of Money During The Next Bear Market

Invest in Real Estate Instead Of CDs

You can buy CDs for security and income. However, in a low interest rate environment, the best risk/reward investment is real estate. Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income.

Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.

I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income. 

104 thoughts on “Should I Buy CDs During A Stock Market Correction?”

  1. If you buy CDs in the middle of a 20% market correction, this is the equivalent to causing your own bear market, or as my wife says “I’ll divorce you if you ever do that.” If you often have these thoughts of doing these things, the 1-2% you pay a financial advisor will often shield you against making horrific decisions such as “buying CDs in the middle of a market correction.” That’s like running away from the grocery store because prices are too low and deciding to grow food yourself. Said differently, you either 1) need serious professional advice or 2) you should never be in the market in the first place if you can’t stand volatility – to paraphrase Warren Buffet. Scared to fly? Don’t get on a plane, but then don’t be jealous when all of your friends have traveled the world and you have never left [insert state you live in].

    Market drops 10%, but let’s say you’re “smart” and sell when your portfolio is down 3%. You then buy all treasuries paying 0.80% yield. The market drops another 10%. Wow!!! Time to start your own investment firm! Congrats, market guru!!!! Then you ignore your investments and suffer from overconfidence. So, now when do you get back in, market guru? All the while, over the next 5 years the market rips 170% you’re celebrating your “huge market call”. Congrats, you have just caused yourself a world of pain and missed out on 170%! Market guru? I think not…

    “Oh well it was money I didn’t have anyway.” Tell yourself whatever excuse you want. Not everyone is cut out to be an investor, and anybody that buys CDs in a market correction never should have been in the market in the first place. The market is a great way of transferring wealth from the impatient to the patient. I’ll take that a step further, it transfers wealth from the undisciplined to the disciplined. You don’t break into the cockpit when there’s turbulence and break out the parachutes, so why the hell would you do it to your portfolio?

    Invest your money in broad-market equity ETFs, don’t ever look at it, and you’ll outperform all of your dumb neighbors that sell into CD’s at the next 2% “market dip,” and likely even outperform the S&P500 because ThEy ChEcK tHeIr AcCoUnT vAlUe EvErYdAy!

    “BuT iT dOeSn’T gO wItH mY RiSk ToLeRaNcE.” I’m sorry, if you don’t understand that more risk doesn’t equal more reward because some idiot firm like Merrill Lynch and Fidelity puts you into a portfolio based on your risk tolerance that you dicate (READ: THAT YOU TELL THEM HOW TO INVEST YOU) that’s not advice and it’s plain moronic.

    Just because I can cut my lawn, doesn’t mean I won’t destroy it. Do yourself a favor and hire somebody that can manage your portfolio and keep you from getting in the way of yourself. CNBC has created overconfident idiots that sell into CDs during “market dips.” And certainly don’t hire some dumb@$$ broker to do it. Get a fiduciary, shut up, pay the fee and let them manage the money, genius.

    And stay the hell out of the cockpit!

  2. I’m 75 years old. I’m currently invested in mutual funds and bonds. I do not want to lose money because I want to leave it to my 2 sons. It is approximately 400 thousand. My condo is mortgage free worth 400 thousand. I’ve been losing money in a 60/40 portfolio and thinking of putting most of it into2.5 CD for 12 months and then deciding what to do with it. Even thinking of another condo investment. I have a income of 4000 a month and $50000 in savings acccont. What do you think?

  3. I love your articles, content, and in depth analysis. However, are there dates of publication indicated somewhere on the posts? I am wondering how relevant some are, including the data and charts, for today’s market and personal planning. Thank you.

    1. Thanks. I try to keep ALL articles current that require updated information.

      So for this article, it is absolute current, especially when you can get a 12-month CD for 2.5% now! Just several years ago, a 12-month CD was paying 0.8% or less. I’m building my CD ladder now in 6 month increments. I suggest readers do the same.


  4. A great reminder with the recent falls in the global markets. I think you made an important point that everything is correlated especially for younger people because they weren’t around when things were different.

    I recall someone asking why anyone would finance a house many years ago when interest rates were 10-15%. Well, if they knew that CD’s were probably yielding around 5-8% then it would’ve made more sense!

    I struggle with how much to keep in cash almost every day! I want to invest and grow but at the same time be protected.

  5. FreedomSeeker

    I am a Federal government employee with about 150k in a tsp (essentially a 401k with some additional benefits) and 520k currently sitting in a money market, a rental house worth 300k that brings in 1600 a month, no debt. My pensions will be about 5k per month when I turn 60 years old and I am currently 46. I want to retire, live cheaply for a few years, travel and get my money out of the tsp since I believe I can drawn down a set amount per month (thinking 4 or 5k per month until funds are expended) without additional tax penalty. One reason for this is that I am concerned about future taxes and this way I can control for a lower tax rate. Another reason is that gives me a few years of living to figure out some additional income streams and explore. During that time my thought is to invest the 500k in a secure lower return (maybe tax free) investment that won’t be touched. Am I on the right track? I think I can do it but fear and practicality make me want to keep working and saving (I save about 35-40k per year).

  6. Financial Canadian

    Hey Sam

    From this post I’ve pretty much gathered that you believe in investing in CDs to provide risk-free cash flow for when times get tough.

    Wondering if you’ve ever considered REITs as an alternative? i understand that you already have a sizeable portion of your net worth in tangible real estate, but the REIT sector’s combination of low beta and high yield makes for a great income source, in my opinion.


    1. I have, but I don’t invest in REITs as 40% of my net worth is in physical properties and REITs basically acts like a real estate stock with a dividend yield. I buy property so I can improve upon it, see and touch the physical asset, and earn sticky rents. I want to be one in control, not a minority investor in a REIT. But there’s definitely a place for REITs for those who don’t own property or can’t own property. It’s just not for me.

  7. Hi Sam,
    I’m 28 years old and I’m just finishing college. I have about $11k in debt (car and school loans), and I’ve been saving my money in a savings account and putting money into my 401k and RothIRA. I’ve been saving money to buy a house to put down 20%, but now I’m seeing that Wealthfront could be a better option. Would you consider that I pay off my debt now that I work full-time and then putting the minimum of $15k into Wealthfront instead of buying saving up for a 20% down?

    Thank you.

    1. Howdy Fres,

      Depends on your debt interest rate. What is it? The good thing about investing with a company like Wealthfront is that your money is liquid if you do want to withdraw to come up with a 20% downpayment when the time is ready. I’m assuming you are not a professional trader, so having a professional digital wealth manager invest your money for free is probably better than you doing it yourself. I’ve seen too many people blow themselves up b/c of POOR risk management. Trust me on this, I’ve gone through my share of blowups. You want to start investing now when you have less money to get comfortable w/ investing over the long term.

      $11K of debt is not that much, assuming you have a job. I would hack away at it while also investing. Check out FS-DAIR on helping you make a better pay down debt or invest decision.

      Good luck!

      1. Hi Sam,
        My interest rate of $2k is 3.75% and my school loans are subsidized loans at 4.25% but I finish school in Dec. of this year. You’re right, I’m not a professional trader, but I love to read all your posts, experiences, and you’re the first blogger that I find credible. Seeing my parents struggle with money and making mistakes makes me want to be better at investing my own money. An example of their mistakes: my parents filed for bankruptcy because a client of his sued him. They asked to keep their home in Orange County and now they pay interest only. None of the mortgage payments of almost $3k is going towards the principal. Their house is also under water. This lawsuit and bankruptcy was in 2007. It’s like they’re paying rent at their own home.

        I will be using Wealthfront now! Thank you for your input. I’m going to read the FS-DAIR during my break!

  8. To answer your title question as to whether one should open up CDs in a market downturn:

    If you are young, then no. You should be doing the opposite and investing MORE. The stock market isn’t a singular entity; it’s a collection of individual businesses that sell products and earn money regardless of macroeconomic conditions. Rather than worrying about paper losses that will rebound, you should be asking yourself which businesses are fundamentally sound and only taking a hit because of temporary macro conditions. You should identify them and buy their stock.

    If you are old, then still no. You’d do better with a fixed annuity, which has a guaranteed interest rate, liquidity features not available with a CD, and a principal guarantee. As a matter of fact, the principal guarantee prevents early surrender chargeds from eating into your principal if you close the CD too early. These features are NOT on CDs; you can actually lose principal on a bank CD. So if you’re middle aged or older and you are looking to take money out of the downtrodden market and put it into the safety of a 5 year CD, do a 5 year fixed annuity instead.

    The only way I’d advocate a CD is a short term (3 month or less) CD with an online bank to be used only as a slightly (very slightly) higher yielding emergency fund. That’s about it. And I still use regular savings accounts with these banks instead.

    That’s my take on the situation. If rates were what they were back in the day, it might be different, but we’re never going to see rates like that anymore.

    ARB–Angry Retail Banker

    1. quantakiran


      As a foreigner who likes to learn about the world, I’m confused. A bank CD does not guarantee the principal amount?

      So it’s different to what we call a fixed deposit, where the principal is guaranteed, and the interest rate and maturity amount is fixed on opening the account? In other words you know what you will be walking away with on maturity, guaranteed.

      Do you guys not have this type of product in your country?

      1. If you deposit $100,000 into a 5 year CD and then come in after one year to close it out, the surrender charges will eat into your principal. You’ll lose very little, but you’ll still lose. Better to get a fixed annuity with the principal 100% guaranteed, along with a higher rate and liquidity features.

        So without reading the fine print on your country’s fixed deposits, I would say that they are the same products.

        1. quantakiran

          Thanks for the answer. I’m really curious about finance but I’m a barely functioning moron when it comes to all things money.

          So a fixed annuity is different to a CD. Then why is a CD preferred to a fixed annuity especially if a fixed annuity has higher rates and liquidity?

          Our fixed deposits have zero liquidity for the duration they are fixed. However shorter notice accounts (30-90days) have some liquidity.

          Sorry for bugging you.

          1. I’m just noticing now that you replied and asked me a question. So sorry for the late answer. And don’t worry about being a “barely functioning moron” when it comes to finance. I sit and deal with people everyday who are true barely functioning morons; I highly doubt you’d fit into that illustrious group.

            As for why people would prefer CDs over fixed annuities, there are a couple reasons. None of them are any good:

            1) CDs are taxable accounts. Fixed annuities are tax deferred accounts. So if you are 25 years old and you put money into a 5 year CD, you are paying taxes on the interest every year. However, once that 5 years is up, you can withdraw that money with zero issues.

            If you are 25 years old and you put money into a 5 year fixed annuity, you don’t pay taxes on the interest unless you take out that money. However, if you take out ANY of that money before the age 59 1/2, you not only pay income tax but also a 10% penalty tax. That’s because the purpose of putting money into a tax deferred account is to save money for retirement. You get punished if you take that money out early. So if a 25 year old SOMEHOW managed to put money into a fixed annuity (which would mean that the licensed banker or insurance agent, the bank if this was done at a bank, and the insurance company offering the annuity all failed to follow even basic guidelines for determining suitability), that would mean that he/she wouldn’t have access to that money for 35 years even if it was only a 5 year annuity.

            Of course, if a person is too young for a fixed annuity, then they should be investing in the market. Of course, that leads me to…….

            2) Millennials are afraid of the stock market. We just are. Not me, but most Millennials. Just like the WWII generation’s aversion to the stock market due to the Great Depression, Millennials today are leery of it due to the Great Recession. They prefer to keep their money “invested in cash”. What do I think about that? I wrote a blog post (it was actually posted today) in which I referred to doing that as–What was it again? Oh yeah!–as “financial f***ing suicide”.

            3) Most people don’t realize that their bank sells fixed annuities. Ulike CDs, annuities aren’t very heavily advertised. That’s because you have to be licensed to sell them, and a LOT of regulations exist on how a bank can advertise licensed products. So not only do people not know we sell them, but they also don’t understand the products. People tell me they don’t want an annuity because “I lost money in the past with annuities”; they had a variable annuity, which is much different than a fixed annuity.

            Hope that answers your questions. And no, you’re not bugging me. It’s nice to see someone trying to learn.

            1. quantakiran

              Thank you so much for your answer.

              So your CD is similar to our fixed deposits, where you deposit an amount in a bank at a fixed rate for a fixed period and pay tax on the interest if it’s in excess of R23 800/year. However we don’t pay for any fees, only penalties for early withdrawal, etc. to the bank.

              So a fixed annuity is more like our recently introduced tax free account. It works like this: you are allowed to invest up to R30 000 a year or R2500/month (up to a lifetime limit of R500 000) in a tax free account as any bank that’s offering that type of account. I’ve discovered that there are two types:
              1) Works exactly like our fixed deposit but if you withdraw the money in the first 16 years, you can’t replace it. But any interest accrued is tax free. Catch: most of the banks although offering better than normal interest on these accounts are charging penalties and crazy high fees.
              2) You can choose to invest the money in the stock market and any money you make is tax free. Catch: most of the banks are charging premium fees on this one (One looked like it would take up to 50% of the invested capital per month!).

              Thanks again for the info!

  9. Great post! We’ve started doing CD ladders last year but this article gave me new perspectives on it. The money we’re putting away is to fund the first 5 years of early retirement and to buy another property but I think it’s a great idea to have 10-20 percent of assets in CDs. The number that we are thinking of saving for the first 5 years will be about 15% of our total net worth.

  10. quantakiran

    Hi Sam

    Great blog. My retirement money (which I count as 1/3rd of my net worth) is unfortunately heavily invested in high risk products (company policy), so with the markets the way it is, I’ve no doubt I’ve lost money this past year.

    Since I am completely risk averse, I decided to go the way of CDs. I managed to find a bank in my country that offers good interest rates that compounds monthly; beating out all the other banks in terms of interest! Bad news, I’ll be paying income tax on it :`(

    I’ve come to the realisation that if government really wanted us to save and be financially free (especially in retirement) they would drop or at least lower the tax on interest and stop giving us lip service about helping us save for our retirement.

  11. Sam, the one thing that makes me hesitant on investing in CDs is the few years of wait before I can touch the money — as someone in late 20s, I think there is value in having some cash in hand so I can jump on the opportunities whenever they present themselves. Do you recommend having some cash on the side on top of CDs? If so, how much?

  12. Given the market correction some may argue that stocks are cheaper to buy, therefore a buyers market. My dilemma is that I need to buy a car. I can pay for it outright but then I will not be able to buy these cheaper stocks. Or I can finance it and pay monthly while using the savings I’ve accumulated to invest in the overall lower market or CDs. Any thoughts?

    1. I’d expect your car financing to be higher than the CD rate you’d get, so that option should be thrown right out the window.

      Are you willing to take a loan to play the stock market? Because that’s what you’re essentially doing if you take a loan to buy a car so you can use the cash to invest.

      1. Thanks for your feedback! Well I’m young (at least I like to think so lol) so it be a long term investment in the market over time. Not really playing the market for short gains. I agree CDs is practically nothing in terms of return but I’m looking for long term growth and am willing do go thru the ups and downs (as we are having now).

  13. Why not consider using permanent life insurance for your risk free assets? There are some drawbacks, but some benefits as well. Creditor protected, tax-free earnings that are typically better than expected CD earnings, and you get life insurance to boot.

  14. Currently we are a little over 20% Net worth in Cash. I know we would earn some by being in CD’s but the we are holding cash for now as we would like to be able to invest if the prices keep going down. We generally like to keep 10% net worth in cash.

    I completely agree with you that losing is so much harder. We are conservative by nature so that is one reason we are hold less in stocks then most people.

  15. OlderAndWiser

    This is an excellent post about much-maligned CDs. Although I’m currently “on the sidelines” waiting for CD yields to hit at least 3% before purchasing more long-term CDs, I still have CDs in my portfolio that are yielding 2.62 – 5.91%.

    In addition to “Armageddon Funds” and portfolio ballast, in my lifetime CDs have served as a way to: 1) “force” myself to save when I was young and just starting to learn how to manage my finances and 2) save for the down payment on my first house.

    An alternative for someone who wants a risk-free investment with a yield slightly higher than current CD rates is Series EE Savings Bonds which are guaranteed to at least double in value in 20 years (equaling a 3.5% yield). The catch is that you need to be willing to hold for 20 years, and can only purchase $10,000 worth in a calendar year. They can be purchased directly from the US Treasury through Treasury Direct, with ZERO fees. I own Series EE Savings Bonds but probably won’t be purchasing more because of my age.

    P.S. – Sam, I don’t know how you feel about mentioning other blogs, but I’ve found to be the best site for researching CDs (and savings accounts).

    1. Wonderful to hear about Series EE Savings Bonds! What if you die before the 20 years is up? Surely there is a secondary market you can sell (at a discount I presume, but maybe at a premium in times of stress) if you need the liquidity?

      I’d happily buy some 3.5% yielding guaranteed treasury bonds as well vs. 2.5% CDs.

      1. OlderAndWiser

        Currently the interest rates on EE Savings bonds is an abysmal 0.10%, so I personally wouldn’t buy any that I didn’t plan to keep for 20 years (when they are guaranteed to double in value . . . you buy at half of face value and at 20 years they are adjusted to face value). You can cash them in with no penalty after 5 years. If you cash in between 1 and 5 years, you pay 3 months interest penalty.

        There are tax advantages too. No state or local tax on the interest. And there may (depending on your income) be no federal income tax if you use them to pay for your child’s education.

        For more info, I always recommend going straight to the source (Treasury Direct):

        The beauty of Treasury Direct is that you don’t have to go through secondary markets. I don’t know what percentage of Americans have TD accounts, but I’ll bet it’s an underutilized resource. There are probably people out there who are paying commissions needlessly.

  16. When I first read the title of this post I thought to myself “no that can’t be FS would never write about CD’s over stocks” after reading the post I realized I agree with everything you said. I invest in stocks when they are the right price regardless of whats going on in the market but I make sure I have a back up of money to protect me in case I’m wrong or something comes up.
    If you have all your eggs in one basket things tend to not work out in the long run, so it’s very important to have money set aside just in case. Rather than having it in a savings/under mattress a CD is the best option to have relative liquidity and grow the capital at the same time.

  17. Sam, are you using that 300k+ in risk free asset as leverage for further investing? I think that one of the most beneficial aspects of low risk investments is their ability to provide capital for leverage. From the original investment you are marking 4% but you are also able to turn it around and make a few additional points from investing on leverage. As I have always heard, you rarely get rich using your own money.

    1. Hi Michael – The only leverage I use is through real estate. It is a wonder to be able to buy an asset 5X more than the downpayment, while being able to write off the interest, and sell without capital gains tax up to $250K/$500K single/married.

      In early 2014, I took on close to $1M in leverage on a new property, monetized my previous property by renting it out, and then paid down about $250,000 in higher interest mortgage since then on an older property.

      With this particular CD coming due next year, and a couple more coming due in 2018, I may buy more property and lever up if there are good deals out there. But, I’ve almost reached my annual property tax limit I’m willing to pay (~$50,000/y), and would need to make much more than $250,000/year to comfortably pay that expense. I don’t want to make much more than $250K due to tax implications and the need to focus more on making more money.

      But using risk-free assets for leverage is exactly NOT what the use of risk-free assets are for!

  18. Rather than all of these machinations, have you ever considered the permanent portfolio? 25% each of long term treasuries, short term treasuries/cash gold and stocks.

    Over the past 40 years it has delivered arkeast a 5% real return over any 5 year period. Closer to 9% for longer timeframes. A 4% withdraw rate is sustainable under any market conditions.

    The nice thing is that:
    -it doesn’t require you to attempt to time the market
    -the cash portion is a built in “Armageddon” fund.
    -it doesn’t have the volatility of a stock heavy portfolio.
    -it’s pretty tax efficient

    i used to mess around with stock picking, various CDs, options, etc. so glad to put all that behind me. What a waste of time and money.

    1. Hi Rob,

      I’ve considered it, but 1) I don’t want to pay a fee to a fund that manages cash, 2) public investments is only a minority portion of my net worth (~30%), and 3) I think most all of us are better at managing our liquidity b/c we are saving and spending money every day.

      I hope less people have the majority of their net worth in public investments due to investments in real estate, alternatives, P2P, etc.

      What percentage of your net worth is in a permanent portfolio? What is your net worth currently if you are OK to share? thx

      1. Total NW is approx 2.5M with 900k invested in a permanent portfolio (approx half IRA and half taxable). Just to be clear, I’m not invested in the “permanent portfolio fund” (Of which there are several I believe). I do it myself and re-balance on 35/15 bands (which happens very infrequently). Some people put the cash portion of their PP in CDs instead. I use SHY. The cash portion of a PP has several purposes (not just to provide liquidity in an emergency).

        I like real estate as far is it provides me with the utility of a nice place to live. But it already occupies around 30% of my NW and I’m not eager to acquire more for investment purposes. High transaction costs, the annoyance of being a landlord (or fees to have someone else do it), exposure to local idiosyncracies and the fact that it often correlates with the stock market anyway (so doesn’t provide meaningful diversification) all leave me cold.

        P2P lending is sort of interesting, but I’d never feel comfortable investing any meaningful chunk in it. And if I did, i’d still stick with no more than a 4% “withdraw” rate no matter what the nominal interest rate was or else its not really long term sustainable on an inflation adjusted basis. For example if you had 100k and were getting an 8% return on P2P, would you really view that 8k as pure income that you could spend? No, you’d re-invest a portion of it to cover inflation, risk,etc. And if its in a taxable account, you have to pay income tax on that entire 8%. Also, if you’re weary of fees on cash-like investments, don’t all the P2P services charge fees? I think lending club is 1% of the income you receive for example.

        As far as alternatives, I think the gold portion of the PP does a nice job exposing me to an asset class with very low correlation.

        Taken by themselves, there’s a lot to hate about each those asset classes (especially gold). But putting them together in a portfolio makes a lot of sense and seems to work well.

        For a while I was obsessed with chasing yield and building “passive income”. But I’ve come to see that fallacy in that thinking and prefer to just have a well diversified portfolio that minimizes sequence of return risks in order to provide a sustainable withdraw rate/”income stream” of around 4%. And I’ve also realized that the more “active” my investing style the worse i do. I think this goes for most people (including pros) actually due to a whole host of reasons.

        The biggest downside (for me) so far is that the low correlation to the stock market means that you can experience very low returns while the market is booming. You kind of feel left out sometimes. But overall, I can handle that much better than 30% drops or worrying about trying to predict the markets and moving things around. I still check on my portfolio way to often though– old habits die hard. :)

        1. Not bad! Good to know. How old are you with a NW of $2.5M? At this level, it’s all about protecting the principal and growing at a moderate 2-3X the risk free rate of return IMO. When do you plan to retire?

          1. I’m 42. If I moved to a lower cost area and made some sensible spending cuts I could retire now. My wife doesn’t agree however. I’m currently targeting age 50.

  19. Very true. I increased my contribution to kids 529 for a “guaranteed” 3% return vs. Vanguard’s Direct portfolio last month. I also initiated a position in Energy Index Fund, with automated investment every month with a small amount. My NW has taken a significant hit in last 21 days, as shown on personal capital. Its hard to see, but 95% of my investments in stocks are through 401K, 529s. And I don’t know if I can do anything about them, but just keep contributing the max and let them do their ups and downs. 401K stock investments are a helpless situation, I feel, while you are in your 20s, 30s or even 40s.

    Who offers the best recurring deposit rates? not CDs but RDs.

    Thanks in advance.

  20. Have you noticed if there is a relationship between people who complain and poo poo about 4 percent returns vs spending a lot of money on mindless things? Just curious…

    I agree with putting a sizeable chunk of your money into safer assets like bonds. I’m looking at corporate and municipal bonds right now and holding to maturity, likely max two years. As well as hoarding cash…until I see a good opportunity, which is looking more and more promising in the markets with some of the stocks I’m following.

    I really resonate with your comment about protecting your principle/money at all cost when you have FU money. So true.

    1. MUB, the muni bond fund ETF I’ve been investing in has been awesome. I just wish I allocated more towards MUB. You just never know, and if you believe the stock market will provide no returns over the next couple of years, principle protection + a 2.5% return sounds terrific. Of course, nobody can probably move their assets around with complete timing.

      But it seems obvious to me as I wrote in my 2016 predictions that stock market returns in 2016 and 2017 won’t be as good as in the past.

  21. Smartest Woman on the Internet

    I’m 52 y/o, mostly risk averse, and have 25% of my $1 million net worth invested in 5-to-10 year CDs. For convenience, they are all held in my Fidelity brokerage account. Fidelity offers a wide range of “brokered CDs” from dozens of nationwide banks. A “brokered CD” usually is held until maturity but it is possible to sell it on the secondary market through Fidelity. The “brokered CD” does not accumulate and compound the interest earnings inside the CD. Each interest payment is electronically deposited into my Fidelity cash “core” account.

      1. Smartest Woman on the Internet

        Right now, CD rates offered through Fidelity are not very good – 2.1% for a 5-year and 2.8% for a 10-year. One can probably do better at a local community bank.

        So, I upped my risk tolerance a little and bought a few BBB- bonds (through Fidelity on the secondary market) at huge discounts. If theses oil exploration companies don’t go out of business in the next two years, I’ll earn 12% per year.

  22. Very informative post. Coincidentally, I did some research over the weekend into CD laddering and found it to be right up my alley. But I’m going to hold off for now because I don’t have the capital currently to start 5 or more large CD’s. I currently hold my emergency funds in an online savings account with Ally which is yielding 1%. Their 5 year CD is at 2% at the moment, which I don’t feel is worth making my emergency funds illiquid. I could do a 1-2-3-4-5 year ladder, but with rates so low I’m not sure it’s worth it.

    I’m happy with leaving a healthy emergency fund in an online savings account while putting any extra money towards our student loans. Once I can get rid of some of the higher rate loans, I will definitely give CD laddering a go.

    1. On the same boat you are except I barely have the emergency fund set up.

      Little by little. Also, I see myself investing in Prosper or something similar rather than low interest CDs.

  23. Good advice Sam. We are all in such a hurry to become financially independent that is it easy to look over safe investments such as CDs. As rates go up and the market heads south, this is a sound idea. Thanks for sharing.

  24. I agree with having at least 10 percent of your net worth in risk free assets. But it also depends on your age and current net worth level. When I was 22, I only had a few thousand to my name, and couple thousand in a Ira. In 2008 I was only 23, with very little skin in the game, my income was outpacing my net worth at the time with leaps and bounds, so it didn’t matter how much my stock funds fell because I was out pacing it fast with new money. Regardless, I had a healthy emergency fund and even some CDs paying about 4-5% left over from the high interest times. If early in the game and low net worth, establish a good emergency fund and invest like a mad man I say :) bear markets and when the market is at low P/E ratios is a great time to invest for the long haul. But always I agree on having that safety net. At that time I was also very confident in my abilities to hold employment down with no issues, due to being in the military, after I got out the demand for highly paid US security consultants in the Middle East was growing and growing, and it doesn’t seem to be going away any time soon, but anything can happen and things like extreme budget cuts could cause a lot of jobless. But either way I’m prepared for the worst case scenario and the best. So I stand some where in between.

    1. Somewhat agree. Even if you are 22 with only $5,000 total to your name, I do encourage such a person to have 10%-20% in risk-free assets. Minimum CD account is generally $1,000. It’s about creating the discipline early on.

  25. Not a huge CD fan here with rates being so low. I choose to buy individual highly rated bonds and just hold them to maturity…but when (and there will come a day) CD rates start to go back to historical normal levels I will absolutely park some of my money there. Yes seeing your net worth go down by hundreds of thousands does pinch a little, but that is why you diversify. I feel pretty happy now being only about 30% correlated to the markets. I dream of the day were us responsible savers will be able to build laddered bond & CD portfolios that will throw off 5% annually. My former partner bought a 20 year treasury back in the early 80’s I believe and he said he was making 18%! Now that I could not comprehend!

    1. +1

      My biggest reservation about CDs isn’t about the opportunity cost of having not invested it in higher yield / higher risk investments, it’s about the low rates of CDs these days.

      We currently keep our reserves in cash. It’s hard for me to get worked up about the 0.75% difference between going with a CD instead of basic savings. I check rates periodically, e.g. after the recent Fed rate increase, but again another 0.25% is hard to get excited about.

      I’m getting tired of this ZIRP policy. But at least it’s better than NIRP…

    2. I’m not a huge fan of low returning instruments either. But I’m REALLY not a fan of losing money in the stock market either.

      Everybody needs to come to terms that returns will be lower for longer. As a result, I’m really a fan of starting a website and a business to try and actively make money on your own. I KNOW with a lot of effort I can easily make a 10% return on my money. As a result, that is where I’m spending the most time.

  26. Early Retirement Actuary

    “Even when a CD was yielding 4%, people complained because the stock market was returning an even greater amount. Stock jockeys with little experience thought they couldn’t lose in 2007. Then they lost their shirts, their pants, and their Storm Trooper underwear when the stock market melted down in 2008.”

    I can’t say that I agree here. The only investors that lost in ’08 were the ones who sold out. Buying and holding a low cost S&P fund (i.e. SPY) throughout the crash would have netted you a bountiful sum by 2011 from the compounding of dividends throughout recovery, even if you bought at the peak. I live and die by the assumption that investors only need one diversified stock fund and that the market will always recover.

    Granted, I’m also assuming that you’re saying all of this with the notion that people are panic selling, which is probably fair of most people unfortunately. Regardless, I keep CDs and other fixed income out of my portfolio. If the rates got into the 5-7% realm, then I might reconsider.

    Like you, I consider never touching principal to be ideal. But I rely more on dividends than fixed interest right now simply because the FED has kept the rates so low.

    1. One of the greatest things about the Internet, is that I’ve never met anybody except for myself online, who has lost money in the stock market. Everybody has either held on through the downturn or Wisely bought more.

      Given that nobody ever loses in the stock market, I’m also much more bullish on people’s financial situation then the media like to believe. If I worked in mass media, I’d be bearishly bent too given what has happened in the industry.

      I think there is more wealth out there than anybody can ever imagine. Stealth Wealth is very strong!

      1. Ha! Not many Generation Xers online then. We all got hammered early and often. I think I still have some WorldCom lying around somewhere…

      2. You have now! Thought I timed the oil bottom perfectly. Bought 1000 shares of linn energy,”line” at 11.00. Bought another 1000 shares at 7.00. Bought 2000 shares at 3.00 than another thousand at 2. Its currently trading at a 1.00 and probably on its way to 0. A CD at 2.5 percent looks pretty good now.

        Thanks, Bill

        1. Nice to meet you!

          But as the young guns who’ve never lost say, “Double down! Time to buy more! You never lose if you don’t sell!”

          Is LINE really going bankrupt? Seems quite enticing at this level. Can’t believe it has gone from $40+ to $1 so quickly.

            1. At least you’re honest Bill! It’s been a rough, rough couple years for all involved in oil and gas. It’s possible that entire towns in North Dakota disappear with oil at $30. A lot of regions in Canada are suffering as well. Who would have that that a collapse in oil would be such a net negative for investors, economies, and employment.

        2. Early Retirement Actuary

          I took plenty of losses like that when I was younger. Some of them recovered and others I bailed on. I just do index investing now. Super boring but it works in the long run.

          Funny you mentioned the stealth wealth. That post remains one of my all time favorites. I stumbled upon it about a year or so ago as I was starting to downsize a lot of the useless material stuff in my life. Couldn’t have come at a better time.

  27. Love your site Sam! Do you have any advice on where to get the CD’s? I have 250k I want to put into ladder CD’s. Researching on-line, I see a lot of banks I’ve never heard of. I just don’t want to pick the wrong one obviously!!


    1. Any FDIC insured bank, or NCUSIF insured credit union, is safe. And most brokerages offer brokered CDs (FDIC bank issued CDs for brokerage customers). So just get the best rate unless something being nearby and brick-and-mortar is important to you. The only caveat beyond that would be that if $250K is a small part of your financial nut, there can be reason beyond rate to park your CDs at (typically) a local or regional bank. And that reason is “relationship building.”

    2. Hi Mitch,

      I’d ask your existing bank for their CD rate sheet, visit a couple other banks and ask, check online (I have a CD rate widget in the top right of my site I keep an eye on), and then check online for the best CD rates.

      Start with the big banks first, then local credit unions.

  28. That’s so funny you suggest 10% in CDs of net worth because that’s very close to what I have! Sweet! I put together a report on my net worth lately and have 11% in CDs and cash. I think the CD portion of that is about 9-10% at the moment. It feels good to have that in these type of markets.

    I rest easier being diversified in shaky markets!

    1. Ah, very nice you spent time to analyze your net worth and write things down. I bet 90% of people do NOT do what you do. Figuring out one’s net worth and properly asset allocating should be fun, informing, and helpful to building wealth.

  29. I have 20% of our non real estate investment in bond funds. I will probably shift some of these into stock if the market keeps dropping. I would consider CD when the rate is higher. 4% would be great…
    Yeah, I doubt stock is going to go up very much in 2016. Maybe it needs a year or two to settle back down.

  30. “A 2.5% yielding 5-year CD does not exist in a vacuum.”
    This. Even as a fairly new investor, something that seems to be too commonly overlooked is that no asset exists in isolation. Narrowing focus solely on a single investment misses the bigger picture and can set you up for huge losses.

    That said, I’m young and risk tolerant so my plan during a correction is to stick with my plan. I may be a little more cautious and build up an Armageddon Fund, but I have already considered contingency plans for potential lean times. The fact that the stock market has always trended upward in the long term doesn’t mean you don’t need to consider what actions you’ll take during short-term down swings. Blindly investing without considering the downside “because growth” is a huge mistake.

    Overall, I think you’ve made a good case for CDs and it may be something I look into when my net worth has grown and it’s more critical to protect myself from large losses.

    1. Hi Stephen,

      Thanks for recognizing that a low CD interest rate does not exist in a vacuum. People who don’t try and understand all the moving parts tend to invest inappropriately and result in poor returns.

      The great thing about being young and not having a lot of money is that you simply can’t lose much during a bad market. Bad times are exactly the time to learn, invest, discover your risk tolerance, and build a long term foundation for investing.

  31. After a year or two of trading in risky stocks like biotechs (and losing a ton due to buying high and selling low), I realized I was my own worst enemy as I could not remove my emotions from the day-to-day drama of the market. I took my remaining cash and plowed it into 5-year Ally CDs + high-yield savings. Since I’m in my late 20s, I decided on a new strategy: Never sell, only buy, and when buying only buy index funds. So, I started to slowly dollar cost average into the market using Betterment in conjunction with maxing out my retirement contributions each year (which continue to invest mostly in stocks). This has helped me sleep much better at night.

    I’m curious if anyone has thoughts on the tax implications of CDs vs. index funds. CDs, I believe, are taxed annually as normal income, whereas capital gains from index funds are only taxed when you sell/realize those gains. Not sure how much of a difference this makes, but it would be interesting to see an analysis of the tax consequences over time.

    1. I really like the ability for investors to automatically contribute to their Betterment account each month after inputting their checking account info. Automatic contributions is such an important aspect of building a sizable portfolio over the long term.

      CD interest income is taxed as regular income. For me, CD income has therefore increased since I now make less than when I had a job 4+ years ago. Betterment and Wealthfront do a great job in tax loss harvesting to try and minimize taxes.

    2. Matt,
      CD = Interest earned, even if not withdrawn, is taxed annually at your ordinary income tax rate

      Index fund or any mutual fund in a taxable account (i.e. not a 401k, IRA, etc.) = Even if you don’t sell the fund shares, you’ll still have a small taxable income b/c 1) the fund manager sold some stocks, 2) stocks paid a dividend, or 3) the fund earned some interest. Dividends or capital gain distributions are generally taxable when made, regardless of whether the investor reinvests them or receives them in cash.

      The tax advantage of dividend income over interest income is that qualified dividends are taxed at long term capital gains rate of 0, 15, or 20% instead of the higher ordinary income rate.

      A fund that mirrors the S&P 500 is tax-efficient b/c there’s almost no turnover in the S&P 500 index so the fund manager isn’t selling any shares and creating capital gain.

      Having said that, what’s even more tax efficient is a municipal bond fund from your state. For example, since I live in CA, the interest income earned from a CA municipal bond fund is exempt from both federal and CA taxes. :)


    3. Financial Canadian

      I think your technique of “never sell, only buy” is very ideal.

      I personally follow the same philosophy, with a lifetime retirement goal of generating my current income via dividend income alone. After a lifetime of capital appreciation and dividend reinvestment, this is going to be rather feasible I think. I am also overweight in high-yielding stocks (Canadian banks, REITs, telecoms), which helps.

      Most importantly, this means I’ll never need to sell!


  32. Sam: Thought provoking as always. What is your view on the notion of leaving funds in 401k even though the market is tanking because some say that you cannot time the upswing in the market if you are in late 50’s.

    Many thanks.

  33. I think most people forget that stocks go up slow but come down fast and hard. As someone who has learned the pain of the 2000 Tech bubble and the 2008 financial crisis, I can attest that losing 50% of your money almost overnight… money you worked years to earn, taught me something about myself. I really don’t like financial risk. I knew that meant I was going to have to accumulate a sizable pile of “earned money” so that I didn’t have to subject myself to excessive stock market risk in order to get to where I wanted to be financially. I did it using a lot of the techniques described here by Sam. Now I am even MORE risk averse since I have a family and I never want to lose that FU money because it would mean spending less time raising my kids. I’d rather feel a little anxious that I’m missing out on market gains than losing sleep when the big drops come.

    Question for Sam, Do you include your primary residence in Net Worth calculations? I usually don’t for purposes of investment allocation calculations because I feel its more conservative.

  34. Right now, we are sitting at about 15% of NW in cash. I think as a sweeping generalization, millennials either feel like they are immune to the risk of the stock market (as you have alluded to many times, we haven’t seen a downturn with our own money invested) or don’t want to risk playing in stocks at all. The vast majority of my friends fall on this opposite side of the spectrum. They are afraid of the stock market and think it’s too risky and don’t necessarily want to take the effort to learn about stock type choices and develop a long-term investment strategy. Of course in reality, somewhere in the middle of this spectrum is probably ideal.

    I will echo what the above comment says about making sure that our risk is aligned with our investment time horizon. If I am saving money for the next 5-15 years, I would certainly agree with you that we probably want to at the very least limit equity exposure because markets could go down in that timeframe and take nearly the whole 15 year period to rise back to an even state.

    But from a long-term perspective, I don’t see any reason to change my investment strategy of heavy equity investing for my long-term goals. Maybe it’s my naivete speaking but I have little doubt that markets will move up and to the right over the next 30-40 years. If they don’t, we likely will have many civil unrest problems in the world where investing for retirement will be the least of our worries. This is of course where staying on the proverbial rollercoaster throughout time is so difficult.

    1. 15% of NW is good. It’s definitely within my 10-20% recommendation.

      Interesting you bring up that most of your friends are super risk averse. I met a couple under 30 folks who are 50%+ of net worth in cash who also work at a financial tech company!

      It’s really hard to figure out what your true risk tolerance is until you actually lose a lot of money. This is why massive panics happen. People THINK they are OK to lose 20%, and once they do, the panic ensues and the markets go lower and lower


  35. Interesting theories, Sam. I’m not a big fan of CDs myself, but you and I are in very different places financially. For me, the growth factor is more important than the safety right now. When you buy CDs in a low interest rate market, do you tend to buy them for shorter terms, in hope of an interest rate boost later? Or keep with the 5 year term regardless, to keep the structure of your ladder?

    1. Do you never fear negative growth? What were you doing with your money from 2000-2003 and 2008-2010? Everybody needs enough money to HANG ON for the inevitable rebound and not sell at cyclical bottoms. It can be in cash, CDs, or something that is liquid that doesn’t lose value.

      The main takeaway everybody needs to understand about CD interest rates (returns) is that everything is correlated. A 2.5% yielding 5-year CD does not exist in a vacuum. A CD is yielding 2.5% because inflation is low, the demand for less risky or risk-free assets is high, stock markets may be on shaky ground, and central banks are accommodative. Financial risk and reward are always entwined.

      1. I don’t fear negative growth much, because of my current financial stage. Even if the market tanks, my job is pretty safe, and I earn pretty good money. Likewise, rental rates are fairly stable (they rarely drop off a cliff), so my rental income is pretty well insulated, too. If I were dependent on the stock/bond markets for income, it would be a different story.

        From 2000-2003 I was working and adding to my Roth IRA, although I wasn’t allocating all of my money to tech mutual funds anymore, and from 2008-2010 I was working and NOT adding to my stock positions, although in hindsight I should have. Part of the reason I wasn’t adding in 2008-10 is because my AGI bumped me out of the Roth IRA contribution, and I hadn’t done enough homework on alternative retirement options to know what to do next. My cash flow was also pretty tight because I was juggling my current house and my cash-flow-negative condo, and I was rushing to pay off the second mortgage on my house (borrowed @ time of purchase to avoid PMI). Now I’ve gotten all of that taken care of so I’m back to contributing to my Roth IRA (backdoor Roth) and solo 401k and brokerage accounts, in addition to paying off additional principal on my house.

        1. Gotcha. Did you say you were in law? My occupation was 100% correlated to the stock market, hence my need for more stability.

          Law firms did shut down here in SF and NYC during the last downturn. But I forget the firm’s names.

          I’m glad you feel your career is very stable. Careers are not so much in tech, Internet, finance, construction, biotech. Anything cyclical or with low profit margins is tough.

          1. Yep, I’m a lawyer. Good memory! Yes, some of the BigLaw firms closed their doors, but many of them were heavily connected to the sub-prime meltdown or their biggest clients were the financial giants who were in trouble, so losing those clients cost the firm dearly.

            At our very small firm, thankfully, we are not too reliant on any one business, and our overhead is much smaller, so we can be more nimble. We’re never faced with the tough decision of firing 100 associate attorneys and then wondering what we’re going to do with all this extra building space we’ve rented.

            I completely understand that your situation was different, being that it was linked with the performance of the stock market. Believe me, I feel very, very lucky to be in the job I’m in. If I didn’t have job stability, I’d be looking for financial stability elsewhere, like you have.

  36. Great post as always Sam. The challenge I encounter is the inability to resist the urge to pay extra toward my mortgage and student loans currently at 3.5 and 4% respectively. I look at it as 3.5% rate of return versus 2.5% on a cd. Also my mortgage is providing no/minimal tax benefit after refinancing.

    1. Tom,

      Great point about the alternative of paying down a higher interest rate mortgage. There does need to be disciplined because even though the mortgage interest rate might be higher, the actual property value may be getting decimated in a downturn. You don’t want to throw good money after Bad if the inevitable outcome is that you will foreclose. But if you know within your heart of hearts that you will hold onto your property forever, then gradually paying extra principal to pay down a higher interest mortgage is also a good idea.

      Whatever the case may be, I strongly recommend people build a CD fund or in Armageddon fund through an online savings account to give them financial security.

      1. This is a point I took to heart and may well have been one of the core principles of my investing philosophy. My first home mortgage was a 30 year 5.125% which I paid off in just over 3 years between 2009 and 2012. Granted the stock market appreciated considerably more during this time I couldn’t overcome the emotional consequences and risk of losing capital in the market for a perceived return when I had a 5.125% GUARANTEED return. My non-liquid assets realized the market bull run via 401k maxing out and my liquid assets above emergency fund threshold were diverted to mortgage principal. One should view a mortgage as a bond or CD. Given you will most likely never find a bond or CD with a rate greater than that or your home mortgage one would likely always benefit from paying down principal until mortgage free. I would hope that anyone halfway saavy financially would never place themselves in a situation in which defaulting was an realistic possibility so I do not see that as a strategic “out” for most investors. Presently, I have since moved to another house with a 2.75% rate. I have decided to keep a nominal mortgage on this as a leverage and inflation hedge.

  37. I like the idea of a little more risk-free but not this month, maybe next month or the month after. Everyday interest rates are going to inch higher and the stock market is already down 10%. With that extra margin of safety in the market, I am going to continue to dollar cost average into the market keeping CD’s in the corner of my eye. I expect to strike on a CD by spring of 2016 to build the risk-free slice of my portfolio.

    1. It’s a good idea, and so will I be dollar cost averaging down, but only with about 40% of my savings now versus 70% prior as I really want to build as massive of a cash hoard as possible over the next couple years. I want to be ready to buy new property or particular companies if things go really bad.

  38. Hey Sam,

    Thanks for posting on using CDs to build your buffer for lean times. I’ve given thought to building a buffer from CDs as well, however on smaller time increments and initial deposits to get in the habit of making this part of the overall saving plan.

    1. Yes, start EARLY practicing allocating a portion of your savings in risk-free assets. It’s first called an emergency fund, then develop it into what I call an Armageddon Fund so you can sleep well at night, hold on to your risk assets, and keep doing what you’ve always been doing during a recession.

  39. I think it just depends on your timeline and your goals. If you’re starting from scratch then it makes sense to dump it all in the market because you’ll have plenty of working years and time to recover as long as you’re resilient and leave the accounts alone. I would never suggest a CD for an 18-22 year old because they have nothing to lose.

    If your goal is to be worth $10 million and you won’t stop until you get there then it will never make sense to own CDs. If your goal is to live comfortably and not worry about money once you get to that point – CDs and other low stress/risk free options would make sense.

    I do understand where you’re coming from when you say losing is much more painful than gaining is joyful. I agree with that overall. Losing anything hurts whether it’s money or a family member. When you have more to lose then it gets harder. It also depends though on how much you really feel like you’re losing. Again, if your goal is $10m and you just lost $500k, you’re not going to care as much as if your goal was $1m. So I guess it’s fair to say the closer you get to your goal, the harder it would be to lose what you’ve accomplished. It gets trickier I guess if you have no goals. In that case maybe you wouldn’t care one way or the other.

    1. Ricky,

      Your nothing to lose attitude has rewarded you handsomely. Congrats for getting to a $10M net worth without any risk free assets. How long did it take and what is the composition? Or were you conjecturing on how you would feel if you got to $10M?

      I do admire you for being able to withstand $500,000 hits in net worth. I personally feel very uncomfortable losing that amount of money in a short period of time (1-2 years) because my income is not great enough to make up for that after tax loss in one year now that I no longer have a day job.

      At 18-22 I only had several thousand dollars in my name from side work and gifts. I started investing in stocks online in college, and only started investing a portion of my savings in CDs until after I realized what a long slog work would be and how vicious the markets can be with the dotcom collapse (age 22, year 1999).

      What industry did you work in after college and are you still working now?


      1. All I was saying is that $10M is a Hail Mary type of goal and that 99% of people would need to throw everything they have into the riskiest endeavors they could find to ever reach that milestone in their lives (assuming they started from nothing to very little). Sorry, I realize I didn’t give much context. I still agree that anyone and everyone needs a low risk emergency fund, and CDs are probably the best place to put that.

        As far as losing money, I was just saying that it’s obviously relative. Losing 5% of your net worth is much more tolerable than 50%.

        Most of my net worth right now is in real estate. The rest is cash, so I was by no means saying that I have $10m or am shooting for it. Quit job 6 months ago in sales. No need to go back but I’m entering the IT field when I can.

        1. Did you not see Aaron Rogers throw two Hail Mary’s this season? $10M is much more obtainable than you think! And I would venture to guess those who get to $10M didn’t do it mostly through investments, but by starting a business.

          I can ASSURE you that losing $500,000 if you are worth $10M hurts just as bad as losing $50,000 if you are worth $1M. Actually, I think it feels worse.

          Can you elaborate on entering the IT field? Are you shifting careers or something?

          1. Loosing 5 percent of your net worth is not a big deal in my opinion. As long as you have strong cash flowing investments and enough in a emergency fund or amermagadon fund! If your net worth is tied to real estate and the stock market, fluctuations of 5 to 10 percent or more seem quite normal. its not a loss unless of course u decide to sell and lock in the loss or gain. If one is really worried about the potential to loose value in the short term then they have no business to be in real estate or a heavy stock portfolio right? Or they must be in a very aggressive allocation and need to dial it down. The only way to avoid a loss is if you are entirely in CDs. With a huge portfolio of 10 million in assets that would be enough income at a 2.5 percent rate to live on. As for me I’m not in the millionaire range yet, so I’m risk on till achieve that! If the market plummets more than 20 percent or more… I’ll likely dive into index funds hand over fist. At 31 it seems like a good bet for the long term. Here’s hoping for a deeper correction. 10 percent doesn’t corrections don’t do it for me. A good 30 percent correction or more would really show some opportunity.

            1. agreed, larger that nest egg gets the more we want to protect it. But unless at that level of assets we go all in on just CDs and high yield savings accounts, there doesn’t seem to be any other asset class that will give you full protection. At 10 million in 2.5% CDs it would still be 250k a year before taxes, I certainly can live a great life style on about 100k-150k. So I suppose at that level, there is very little need to take on any risk, unless one wants to keep it growing for future generations.

      2. Hi Sam

        I am also a believer in CD. Question is where do you find 2.5% return I see mostly as high as 2.2%?


          1. Thanks Sam. I have another question. The stock market is doing quite bad now. I have already worked for 18 years as an engineer and have little over $400K in 401K. Last 2 weeks my value dropped by $30K, makes me very nervous. I am in my mid ’40s, my job is very demanding but pays well, I can’t work in this job for another 20 years. Anyway, my question is should I move my 401K money which is invested into different funds (stock and bond funds mixture) allowed within my 401K, to a money market fund which will retain the value but with no gain or loss or should I keep it as it is? Although I may not work in this job for 20 years, I am not planning to use this money till I am 62, 17 years from now. Your advice will be very helpful.



            1. I wouldn’t touch your 401k money due to the withdrawal penalty. Instead, I would reallocate to stable value funds and bond funds. There should be such an option in your portfolio. A 50/50 equity/fixed income split at most if you are afraid.

              In the meantime, I would simply try and save as much after-tax, after 401k max contribution as possible AND try to do some side hustling for extra income.

              Good luck!

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