The pros and cons of CD investing
Amanda Dixon
Senior banking reporter
Certificates of deposit may seem boring and predictable. But that’s precisely why some investors find them so compelling, particularly in times of economic uncertainty.
With millions out of work due to the coronavirus and concerns about the trajectory of the pandemic-triggered recession, a top priority for many families is managing money well and protecting their savings.
If you’re looking for a place to park funds for a specific period of time and you value peace of mind, a CD could be worth considering. Here are some of the pros and cons of investing in CDs and what to take into account before taking the plunge.
Cons of CD investing
1. Limited liquidity
One major drawback of a CD is that owners can’t easily access their money if an unanticipated need arises. Usually they’ll have to pay a penalty for early withdrawals, which can come in the form of sacrificed interest or even loss of principal.
“During times of uncertainty, liquidity is often paramount. This liquidity could be used for buying opportunities in a distressed market, or could even be essential for covering spending needs so that other long-term investments don’t need to be sold,” says Alex Reffett, principal and co-founder of East Paces Group in Atlanta. “Purchasing a CD can be a reasonable way to earn interest on money that would otherwise be stagnant, however with multi-year CD rates below 2 percent, it may not be worth sacrificing the liquidity for such a small yield.”
One way CD investors can increase their flexibility is to create a CD ladder made up of CDs of differing maturities, so portions of your CD savings will be available at regular intervals.
For example, you could build a CD ladder with three rungs: a six-month CD, 1-year CD and 2- year CD. The shorter-term CD gives you access to some of your cash sooner so you can take advantage of higher rates in the future. The longer-term CD lets you earn the higher yields that are being offered now.
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