January 2001
The Return of the CDs
By Robert K. Heady
Guess what’s almost back in vogue? The bank Certificate of Deposit. That’s right. The sudden instability in the marketplace, which has been characterized by sagging stocks caused by the Mideast conflict, rising oil prices, weak corporate earnings and the elections, have pushed CDs into the limelight again.
The picture looks like this: The Dow Jones average, the Nasdaq composite, S&P 500, Russell 2000 and Wilshire 500 indexes are all off by as much as 22 percent for the year but one can still earn up to 7.6 percent from a federally insured bank CD.
The CD account is insured for up to $100,000 by Uncle Sam, so that it’s impossible to lose even a dime regardless of the wildness on Wall Street.
After watching Amazon.com and Yahoo stocks take heart-stopping 15 percent and 12 percent plunges in a single day, CDs are a far cry. Besides bank CDs, there are two other supersafe, secure routes to go—Treasuries and U.S. Savings Bonds—where investments are protected by the faith and credit of the federal government.
But who wants to fool around with those sexless, bummer bank CDs when he can earn 20 percent to 25 percent in stocks?
Those numbers are now out through the window, the bloom is off the rose and people must figure where their money can grow and certain analysts, who believe that the market will continue to slip, are calling for portfolio diversification.
Experts think that CD rates, many of which were at a five-year high before they began dipping, could be headed downward. The reason is that some bankers have detected a falloff in loan volume and when that happens, banks stop raising rates to attract money and instead move their CD numbers down. In that case, it’s best to lock up the highest-paying CD yields instead of waiting for rates to go down.
For listings of the insured yields, consult the latest rate tables in a newspaper or click onto
www.bankrate.com.
The key is to know how far to go with CDs to avoid maturation of accounts when rates fall into the basement. CD terms should extend beyond the low-rate point in case of a decision to renew. No one is smart enough to forecast when interest rates rise again but in the past 18 years most up-or-down cycles have lasted between 1 1/2 and three years.
Another good investment strategy is to investigate Treasury securities and U.S. Savings Bonds. They’re much more complicated than bank CDs but one can get an easy, fast education at the U.S. Bureau of Public Debt’s Web site at www.savingsbonds.gov, including how and where to invest. There’s something called an I-Bond, for example, that pays 7.49 percent; the yield changes every six months based on the rate of inflation.
A huge plus is that Treasury bills, notes and bonds and U.S. Savings Bonds are exempt from state and local taxes and federal tax is deferred until one cashes out or interest stops accruing after 30 years. Minimum investment is $50 and the interest is added monthly but if one cashes out before five years, there’s a three-month earnings penalty.
You’d be smart to fire any bank that’s been offering a paltry 2 percent or a 3 percent yield on your savings. Shop for a free checking account, keep emergency cash in a high-yielding Money Market Account (6 percent), switch your credit cards to a low-rate outfit and take out a home equity loan for payment of debts and for writing off interest on your taxes.
Whatever your move, one thing is for sure. The days of earning 25 percent a year on a typical stock investment are over for now and one must reset his game plan accordingly.
Our regular monthly features: Banking, Tax Reports, Auto Current, Personal Finance, Book Review, Business Law and Technology.
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