Never put all your eggs in one basket. It’s a saying we’ve all heard and inherently believe, but when it comes to investing money, many of us tend to heap all of our saved money on the latest investment bandwagon.
Presently, that bandwagon is the stock market, which many financial analysts believe is overvalued and overdue for a downward correction. While stocks, if chosen wisely, are still a great place to invest some of your money, you should by no means invest every cent in them. A financial planning expert will tell you that the best strategy is to diversify your portfolio. Regardless of your age, your investments should consist of a combination of various financial products, including certificates of deposits or time deposits.
Certificates of deposit (CDs) are insured by an agency of the United States government for up to $100,000—and, through the a variety of account ownerships, you may greatly expand the insurance coverage on your certificate accounts. The fact that CDs are insured by the government makes them one of the safest investments available.
There used to be only a few types of CDs available, with little flexibility on the rate (interest earned on an account) or the term (length of time you must keep your money in an account). Today, however, there are a multitude of CDs to choose from.
Do some research on not only the rate and term but also how the interest is compounded—monthly, quarterly, etc. A bank that appears to offer the highest rate may not offer the best return if it compounds interest quarterly. Another bank, with a slightly lower interest rate compounded monthly may be preferable. Look at the annual percentage yield (APY) for an accurate comparison of the earnings you will receive on certificate accounts. Also, note the length of time you must leave your money in a CD, which also will have an impact on your return. In general, the longer the CD term, the higher the interest you’ll earn.
You don’t want to tie up your money in a five-year CD if there is a possibility of a major expense in the next year or two. Determine your savings goals and choose a CD with a term that suits them. Here are some accounts that offer added value and that you can typically find in most markets.
Add-On Savings CD. With this CD, you lock in at a fixed rate of return for a specific term, but it allows you to add money to the CD at any time at the same interest rate. This is particularly valuable if rates decline during the term of your CD.
Bump-Option CD. This CD allows the account holder to alter the interest rate and annual yield one time during the term of an account. If interest rates take a jump after you open an account, you have the option of bumping up to the current interest rate.
IRA CD. This CD allows individuals to establish a personal savings plan that offers certain tax advantages for funds set aside for retirement.
Jumbo CD. This is for individuals who want to invest large sums, usually $100,000 or more, and often features higher rates and yields.
Set Your Own Goal CD. This CD is usually for a short period of time, one or two years, and allows individuals to establish their own savings goal for a specific purpose, such as a child’s education or a special vacation. This CD usually pays a higher yield than regular savings accounts, and when the goal is reached, the funds are available without penalty.
Home Purchase. This CD is designed specifically to help individuals save for the purchase of a home. If you find a home before the CD has matured, you can apply that money towards a home purchase without incurring a penalty.
Other popular types of CDs include Rising Rate or Step-Up CDs, Stock-Indexed CDs and Brokered CDs. Call your banker or a financial planning expert for advice on which ones meet your specific financial goals.
Choosing the right CD and deciding how much to invest is determined by your age and where you are in the life cycle.
Generally, the younger you are (20s and 30s), the more risk you can and should assume through aggressive investments, such as blue-chip stocks, corporate bonds and small cap mutual funds. However, even at this age, it is wise to invest a portion, albeit a smaller percentage, in safer accounts like CDs.
As you get older and move closer to retirement, you’ll want to redistribute your wealth and place a larger portion of your portfolio in safer investments like CDs, savings bonds and treasury bills. It would be tragic to lose all or even a portion of your hard-earned money just because the stock market took a nose dive.
The keys to investing wisely at any age are to be familiar with the products and markets where you are investing, to work with a financial institution or advisor you know and trust and to diversify your investment strategies.
Knowing which baskets to keep your eggs in means you’ll not only avoid getting scrambled, you’ll come out in the end sunny-side up.
By Connie Christianson, branch manager, Continental Savings Bank, Tacoma