Are CDs a Wise Choice?

The current economy has sent investors scattering for financial safety. The losses from the stock market are ridiculously large, money managers are getting greedy and duping investors with Ponzi schemes (i.e. Madoff) , and finding a high-yielding CD is next to impossible due the lowest short term Federal interest rates in decades. With all the investment options looking bad, you may be wondering if investing in CDs is a wise choice. The answer is yes, as long as you are careful.

Certificate of deposits, or CDs, are low-risk, terms ranging from 3 months to 5 years, and is low yield investment. If you are looking for a way to ensure that your principal stays in tact while guaranteeing some rate of return for your investment, a CD may be it. By utilizing a CD ladder strategy, you can track the industry and stagger your investments based on maturity dates, then reinvest them in another CD – hopefully with a higher interest rate than the matured CD.

Some investors claim to invest in CDs as a way to hedge their bets. There are bear CDs where a small guaranteed rate of return is paid to the investors, and additional profits will be paid based on the decline of specifically noted market indexes. If you like betting against the odds, bear CDs may be a wise investment choice for you.

When the market is bullish, although having a couple of CDs in your portfolio is a great way to diversify your investment strategy, it should not be your only means of investing. By only investing in CDs when the market is bullish, you are limiting your potential profits to the caps mandated by the CD terms.

CDs are always a wise choice to have in your portfolio investment mix, but what percentage of your financial resources should be allocated to CDs will vary on the market conditions at the time of investment.

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These articles are written by the in-house GOBankingRates team.